Thoughts From The Divide – The Driver’s Seat
Compared to some of the wilder FOMC meetings we’ve seen in the recent past, this week’s was relatively tame. Yes, Powell admitted that inflation was running “well above” the two percent target but said, “we have some ground to cover on the labor market side”. Additionally, while there were “questions around MBS” amid the hot housing market, purchases remain the same. And despite a few hypotheticals, including what would happen if inflation was “getting out of control”, Powell shrugged off any insistence that things were changing with nods to the evolving virus situation and the standard assurance that the Fed was “strongly committed” to pursuing its dual mandate.
“It must stop eventually”
While the FOMC made no changes to QE this meeting, the Convexity Maven, Harley Bassman, offered a few suggestions in his “Open Letter to the Fed” on how “to improve Fed policies without inducing and opioid-like withdrawal”. Bassman starts by pointing out some of the consequences of QE, including the rise in financial asset prices and concentrated wealth creation, noting that while “clever quants” may deny a statistical correlation of the above, “who are you going to believe, them or your lying eyes?”.
Given that all the QE and money printing “must stop eventually”, Bassman proceeds to offer a few suggestions. Among his ideas is the reduction in the purchases of MBS. Yes, the purchases have implicitly led to lower rates, but this is just “a nice idea, until it is not”. Bassman argues that the MBS rate decline “has likely been the primary driver of the recent increase in home prices [since 2017/2018],” which have, in turn, pushed “home prices out of reach for many current renters”. Further, he argues that “artificially elevating home prices is not a public policy benefit. In fact, it is a public policy dyspeptic that only adds to the wealth disparity”. This has become a bit of a hot button issue, and several mainstream outlets and commentators have brought up exactly this point. Bassman then goes on to offer various other proposals, with the hope that “ a swift rejiggering … would do a lot to signal to investors to moderate their risk profiles”.
“Central banks are irrelevant”
Russell Napier has a different perspective and explains in an interview with The Market that, courtesy of the government’s involvement in banking, “the power is gone from central banks”. Expanding on the themes he discussed roughly a year ago, Napier argues that governments have discovered that they “can create as much money as they like. Out of thin air” and will use this “to manage the expansion in bank credit… to meet their political goals”. There are likely to be a few unintended consequences, but solutions are available, like forcing “savings institutions to buy bonds” or capping “bond yields at a level permanently below inflation”. Napier notes, however, that the realization that central banks don’t control things may take some time, “people will keep looking at the old regime. Investors still take their leads from central bankers”.
