It used to be that if the US sneezed, the whole world would catch cold. Placed in terms of how the global economy worked, the point was easily made that US demand pretty much directed how it would fare for everyone else. Without US economic growth, the world would surely stumble as it had throughout modern history.
Apparently, this is no more if US central bankers are to be believed. The minutes to the September FOMC meeting were released yesterday and contained within the ball of contradictions was this gem:
The divergence between domestic and foreign economic growth prospects and monetary policies was cited as presenting a downside risk because of the potential for further strengthening of the U.S. dollar; some participants noted that financial stresses in a few EMEs could pose additional risks if they were to spread more broadly through the global economy and financial markets. [emphasis added]
As with EFF earlier in the year (more on that in a minute), or that little thing on May 29, they had to say something. The dollar is causing increasing trouble out there in the world and people are really starting to notice; even those who just a few months ago were shouting about globally synchronized growth.
This explanation, obviously, makes no sense. At least it doesn’t border on outright lies, perhaps then a bit of an improvement over less recent statements. Still, the FOMC is now attempting to claim that the better the US economy does the worse it gets for everyone else. The prior axiom about the order of the world economy has been turned inside out.
It is pretty ridiculous, but even more so in the context of globally synchronized growth. This idea was very simple; everyone would benefit when everyone enjoyed the fruits of recovery at the same time. Classic synergy.
Suddenly, it’s a zero-sum game?
The dollar is now a problem and the modern doctrine of benign neglect (just neglect, actually) strikes again. They have no idea what’s moving the dollar or why. It sounds good, though, and they know, like their earlier canard about T-bills, no one in the media will challenge all the inconsistencies contained within just this small statement.
Just like nobody said anything about that whole “technical adjustment” for IOER. As it stands right now, they’re going to need another one – unless, of course, they really are chicken. The effective federal funds rate wasn’t, actually, boosted by “special factors” as the FOMC had claimed in its July/August meeting minutes. Clearly not.
As of this morning, for the session concluded yesterday, EFF was posted at 2.19% moving up yet another bp. It is now just a single solitary bip below IOER. Almost the entire federal funds range is shifted above that continuing policy embarrassment.
I’ll just reiterate here what I wrote yesterday:
It can be a logical fallacy to claim that if they get the small things wrong then they must be wrong on the big things. There’s much less danger of committing the same one if they don’t even recognize the very, very, very big things. If Ben Bernanke were still Chairman, he would no doubt be in front Congress right now assuring us that collateral is contained.
When they get everything wrong, including the one thing they’re supposed to do, federal funds, there’s pretty much zero danger in suggesting they have no idea what’s going on. Or why.
What we do know for sure, by virtue of nothing other than the FOMC feeling obliged to offer more of the preposterous, is that the dollar is becoming a huge problem (again). The other thing we know for certain is that they won’t do anything about it. It’s not just that they are now 100% committed to the whole “strong” economy narrative, if only in the US today. How can you fix a global problem of such scale and depth when you go to such lengths pretending it isn’t one?