BY JOHN MAULDIN
Jackson Hole revealed things that did not make it into reports by the mainstream media. Turns out, the academic and philosophical underpinnings were being laid down for a radical expansion of the Federal Reserve’s toolbox.
The unthinkable policy that I’ve been warning about since last May—yes, we’re talking negative rates—was not only discussed at Jackson Hole, it was discussed in a positive, even slavishly approving, manner.
Here’s my sense of what happened at Jackson Hole… and what it really means. I think you’ll soon see just how bankrupt—and disastrous—the thinking among the world’s central bankers actually is.
The odd Jackson Hole guest list
Here is the 2016 attendee list. There are central bankers from many nations. You will see policy makers from the US Treasury Department, the Commerce Department, the International Monetary Fund, the European Commission, and other government agencies. You will see professors from global universities and think tanks.
What you won’t see on the list is anyone who looks like a “private market participant.” The chairman of JPMorgan Chase International was there under another guise (as head of the Group of Thirty, which actually has 32 investment banking, central banking, and academic members). But he’s an ex-central banker, so he’s in the club.
I know a lot of people from the private sector who used to get invitations. (Mine always seemed to get lost in the mail.) Esther George’s statement in the 2013 book about the event suggests they included the private sector as recently as three years ago. But they don’t now.
Why not? Inquiring minds want to know…
The on-the-record agenda
What do these people talk about that is so interesting and useful as to draw such top talent?
The public part of the event is no mystery. Janet Yellen’s opening remarks got all the media attention. Then she was followed by a series of other speakers. Topics included:
- Adapting to Changes in the Financial Market Landscape
- Negative Nominal Interest Rates
- Evaluating Alternative Monetary Frameworks
- Central Bank Balance Sheets and Financial Stability
- The Structure of Central Bank Balance Sheets
Think about the context here. The whole world’s monetary brass has gathered in one place at one time. They have 48 hours to sort things out. It would be a huge waste not to use every one of those hours to full advantage.
Whoever set the agenda was aware of all this urgency and settled on the five topics. You’d think that they would dig into each topic deeply. Not so. Most of the presentations are about thirty minutes long, and that includes time for a fellow academic to respond.
So why were they really there?
The Friday and Saturday sessions both adjourned at 2:00 PM. Then, attendees dispersed around the resort and got down to the retreat’s real business. And it was very much off the record.
The NIRP agenda
The Fed made a series of statements that I listed in “The Age of No Returns.” Between February and June of 2016, Yellen went from being unsure that the Fed had legal authority to use negative rates to having no doubt that it could. That’s not a small shift. It tells us that somewhere deep in the bowels of the Fed, someone is cooking up some NIRP contingency plans.
Having established that it has legal authority to use NIRP, the Fed can now develop specific plans for doing so.
What better way to learn the NIRP ropes than by huddling with fellow central bankers who have actually taken the plunge? Jackson Hole gave them the chance. And sure enough, high on the agenda was that session on “Negative Nominal Interest Rates.”
The lead presenter in that session, Marvin Goodfriend of Carnegie Mellon University, is an unabashed cheerleader for NIRP. Dr. Goodfriend was joined on the dais by Marianne Nessén of the Swedish Central Bank, which presently touts a -0.5% policy rate.
Neither of them sees any problem with dropping rates well below zero. So our own Federal Reserve invited them to explain how to do it.
Again, remember that Jackson Hole is not a summerlong retreat. Whatever makes it onto the agenda is there for good reason. The attendees didn’t discuss NIRP for its entertainment value. They were carefully considering its effects and mulling over the practical aspects of implementing it. They also had the Group of Thirty leader in the room, ready to inform the big banks what was brewing.
The Fed is prepared
Clearly, this is all conjecture on my part, but it fits. I believe the Fed wants to have NIRP in its toolbox when the next recession hits. Having NIRP at the ready doesn’t mean they will actually use it, but it does mean they could. The previously unthinkable is now fully thinkable.
If legality is no longer an issue, and the Fed is sorting out the operational details, what stands in the way of a negative rate policy?
The banks and the markets aren’t on board. The deference that Fed officials show the markets is more and more obvious.
The Fed should not be concerned with market opinion and activity… but clearly it is. Yellen, Fischer, and the rest know they must telegraph their slightest move long in advance.
I think they are starting that process now with regard to NIRP. I also think the policy will prove to be a huge, if not catastrophic, mistake.
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