By Denny Gulino
WASHINGTON (MaceNews) – Any clinical look at today’s economy and markets would have to acknowledge something unusual is happening, even that the world of money and international transactions may be hurtling into a future that is mottled with serious undefined risk.
Mario Draghi said as much as he concluded his ECB news conference Thursday. “Markets seem to see “something bigger than simply trade disputes.” We “have to take this reading seriously and be prepared,” he said.
Back in the United States the Federal Reserve’s elaborately staged two-day research conference has ended. It was held in a building as imposing as any in downtown Chicago, the District bank headquarters that stands as one of the Fed’s many monuments to the societal priority of measured stabilizing action optimizing and stabilizing the crucial arena of commerce and finance.
The conference, at which attendance was expected from all the Fed’s leadership, had hardly begun Tuesday when after the first presentation a question was posed from the audience. Why all this emphasis on the Fed’s alternative policy mechanisms?
If the Fed has opened the floor to suggestions from all directions to meet the challenges in this time of “large, frequent, unexpected changes in the underlying structure of the economy,” why not also review fiscal policy? He could have added the same question about trade policy.
Why, the question implied, let Congress and the administration off the hook? The answer, of course, was obvious to all the many current and former Fed officials in the packed conference hall. It has been asked again and again for decades. And this time the response was not much more than a collective shrug and the conference continued with the next questions, the next presentations.
Who posed that question, some upstart reporter or gadfly who wanted to bring to the surface an unanswerable question just to be impertinent? It was Bill Dudley, the most recent former president of the New York Fed. He expressed himself in a similar vein in February, telling CNBC the markets should stop making the Fed a “convenient whipping boy.”
For anyone who saw Dudley’s question as a thunderclap of realism, that suddenly placed the Fed’s conference on “Monetary Policy Strategy, Tools and Communication Practices” in its proper context, the constant drama of Fed decisionmakers wrestling with gargantuan issues on which the well being of so many millions depend was distilled into something somewhat less portentous.
For all its institutional grandeur, the Fed has never been empowered to second guess policy set by others for better or worse. In fact, a cynic might conclude that the Fed’s reason for being is to always stand ready to make the consequences of bad policy less obvious.
So in that light Fed Chairman Jay Powell’s declaration in the second paragraph of his address that opened the Chicago Fed conference Tuesday – establishing explicitly the Fed “put” in case trade turbulence becomes international chaos that brings markets to their knees – was more of the same. Policymakers who hardly ever listen to the Fed and its army of Ph.D economists will be protected to the extent possible.
Should the world’s two largest economies begin an open ended many-layered Cold War-like era, or should Europe and Japan and Mexico be added to the maelstrom, the Fed will be there, not steering the ship or providing much guidance to leadership, but prolonging as long as possible the structure until finally everyone sinks.
Should a credit crisis fueled by the perception U.S. debt is unmanageable the Fed will be there, holding back the tides as long as possible.
Bad policy, even ruinous policy, is not to be second guessed by the central bank. After all. that’s all it is, a central bank.