The quotes below are some headlines from James Bullard's recent public comments, via Bloomberg:
- BULLARD: FED BEHIND SCHEDULE ON RAISING RATES AS QE3 NEAR END (3rd Oct)
- BULLARD CONCERNED THAT MARKET PATH OF INTEREST RATES LAGS FED (9th Oct)
- BULLARD WOULD PREFER MARKET 'BE BETTER ALIGNED' WITH FOMC (9th Oct)
- BULLARD: NOT WORRIED BY INFLATION EFFECTS OF STRONGER DOLLAR (9th Oct)
These simply do not look like comments from someone who believes that more stimulus is required. These are comments that we would expect to hear from someone on the hawkish side of the FOMC and someone who believed that interest rates have to go up sooner and faster than certainly the market was discounting.
Now look at a selection of Bullard's comments from Thursday 16th October:
- BULLARD SEES GROWTH OF 3% OR MORE IN H2 2014, 2015
- BULLARD SEES 2.4% INFLATION BY END 2015, THEN DECLINING
- BULLARD SAYS FED NOT TOO FAR FROM OUR EMPLOYMENT GOALS
- BULLARD SAYS U.S. 'FUNDAMENTALS REMAIN STRONG'
- BULLARD 'NERVOUS' OF FED STAYING AT ZERO AS ECONOMY IMPROVES
If these had been the only headlines from Bullard that day, then we would have had to assume that he maintained his hawkish position on the FOMC. However, below are the headlines that lead to a 4.2% rally in the S&P in just 24 hours.
- BULLARD SAYS FED SHOULD CONSIDER DELAY IN ENDING QE
- BULLARD SAYS FED SHOULD HALT DECLINE IN INFLATION EXPECTATIONS
- BULLARD SAYS MARKET TURMOIL LINKED TO EUROPE OUTLOOK
It would appear that, as soon as there is a little trouble in equity markets, one of the more influential FOMC members does a 180 degree U-turn. He then blames everything that is going wrong on Europe. And finally, he suggests the FED should continue a policy that has been remarkably successful in generating asset price inflation whilst failing to ignite a sustainable economic recovery.
The economic forecasts of the FED have been notoriously poor in the past, not just since the financial crisis, but for a long time before. Given this, and the ability of FOMC members to perform such astounding U-turns within a week, we are unsure that the FED maintain any credibility. Luckily for them, most investors just don't seem to care that much, so long as they print money and equity prices go up. We worry, however, that these investors will wake up one day to an ugly reality that the Fed has lost control.
As for the debate about whether QE has been successful (Bullard claims it has been incredibly successful) this deserves a dedicated commentary (which we will try and write one week), but suffice to say that we can all see how successful it has been at inflating asset prices. But the simple fact that that the US economy cannot gain self-sustaining escape velocity must surely bring into question how successful QE has been in the real world.
We find it slightly ironic that the day after Bullard's comments, Fed chair Yellen gave a speech on inequality. There is little doubt that QE has had a hugely positive impact on asset prices and the owners of said assets have got richer. At the same time, there is a large body of analysis that shows the poor have got poorer as have the middle class. So we have one FOMC member extolling the virtues of QE to support the economy (read financial markets) whereas the Fed chair bemoans inequality in the US that has arguably been exaggerated by FED policies. We have also heard recently from the IMF, Bank for International Settlements and the FED itself about some markets becoming "frothy", and yet they resort to more QE at the first sign of trouble. Exactly how does Yellen expect to overcome inequality when she cannot end QE?
All we can say is that it is likely that asset prices rise again if we do get QE4, but we do believe that the FED is losing credibility and at some point will either lose control or risk being politicised. The fact that these guys are considering QE4 before QE3 has finished, and after only an 8% market decline, indicates how worried they are by the structural headwinds affecting the global economy and how vulnerable the whole system is to another bear market.