Pic via Kitco
Oh logic, you always ruin it for everyone, don't you?
Here are the facts so far:
- the dollar is fucked
- the Fed is fucked
- American politics are fucked
So while Ben Bernanke is getting all academic in this motherfucker, let's look at it for what it is: a mess. Lucky for all of you, I totally speak Fed so let's attack Bernanke's comments one obscure reference at a time and see what we can uncover from Jackson Hole.
Here's what your favorite barbarous relic got worked up over today:
"The hurdle for using nontraditional policies should be higher than for traditional policies," he said. "At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."Translation from Fedspeak: "Holy shit, we are FUCKED aren't we? So we'll do whatever we can to get unfucked but really I have absolutely no idea what I'm doing so, you know, let's just keep doing it and hope that it clicks eventually. I'm pretty sure it won't but hey, might as well give it a shot."
Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors' expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about "tail" risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.
Translation from Fedspeak: "Yeah so, um, we get no one wants American assets at this point so we're totally and completely cool with not only being the 'lender of last resort' but basically biggest sucker as Washington tries to pawn off more and more debt to people who don't want it. It's all good, we got this, don't trip. We have HELLA tools left, like, you know, printing money and stuff. We got this. Stop trippin, boo."
While there is substantial evidence that the Federal Reserve's asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual--how the economy would have performed in the absence of the Federal Reserve's actions--cannot be directly observed.
Translation from Fedspeak: "Right, so, you, me and anyone with half a brain know what we've done this far hasn't done shit but let's just keep doing it MMMMKAY because who else is gonna do it? US, that's it! The Fed will do it, don't you worry your pretty little head. And if you need actual like numbers and stuff, don't ask, just trust us when we say this has totally worked!"
Clear communication is always important in central banking, but it can be especially important when economic conditions call for further policy stimulus but the policy rate is already at its effective lower bound. In particular, forward guidance that lowers private-sector expectations regarding future short-term rates should cause longer-term interest rates to decline, leading to more accommodative financial conditions.
Translation from Fedspeak: "Listen, you fuckers, we already TOLD YOU we're printing at full force for as long as those stupid Europeans are in a worse position than we are. Once people figure out the dollar is worthless I guess we're screwed but until then, you better believe we are printing 24/7 for your sake. You're welcome."
Making monetary policy with nontraditional tools is challenging. In particular, our experience with these tools remains limited. In this context, the FOMC carefully compares the expected benefits and costs of proposed policy actions.
Translation from Fedspeak: "Yeah... uh... we have no idea what we're doing. Our bad."
In light of the policy actions the FOMC has taken to date, as well as the economy's natural recovery mechanisms, we might have hoped for greater progress by now in returning to maximum employment. Some have taken the lack of progress as evidence that the financial crisis caused structural damage to the economy, rendering the current levels of unemployment impervious to additional monetary accommodation. The literature on this issue is extensive, and I cannot fully review it today. However, following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession level, and, although the recent recession was unusually deep, I see little evidence of substantial structural change in recent years.
Translation from Fedspeak: "Wow, seriously, I can't believe this shit didn't work. Why didn't it work? It was supposed to work. I should be a hero by now. Is this an episode of Punk'd or something?!"
As I have discussed today, it is also true that nontraditional policies are relatively more difficult to apply, at least given the present state of our knowledge. Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.
Translation from Fedspeak: "We have absolutely no idea what we are doing but you can't blame us when this doesn't work out. SUCKERS!!!"
Yup, fucked. Don't say I didn't try to tell you so.