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Krugmenistan vs the Permahawks

Lift Off! That was the announcement by the Federal Reserve this week when the world’s biggest and most influential central bank started the long awaited raising of its benchmark short-term rate a quarter point from near-zero levels, marking the first time the Fed has raised rates since 2006 [1]. Based on that alone it would seem like this was big news. But given that this rate hike was telegraphed for quite a while now and virtually everyone was expecting the Fed to do exactly what it did, it’s not quite as big a story as it could have been. For instance, if the Fed had decided not to raise rates, despite all the telegraphing, that probably would have been a bigger story. But would it have been a bad story if the Fed decided to keep rates at their current near-zero levels? Would that have been a story that damages the credibility of the Federal serve in the eyes of the market? There’s a big debate in the economic community over that. And since the Fed has been pondering its historic “lift off” moment for years now, it’s a debate that’s been going on for years too and as we’re going to see in this post, it’s a debate that pits prudent economists with excellent track-records like Paul Krugman [2], someone who opposed [3] the Fed’s December “lift off” decision [4], against the broad array of “permahawks” who have a seemingly endless list of often contradictory reasons to raise rates now, now, now [5].
But it’s not just the question with respect to Fed. The European Central Bank made a policy announcement this month too regarding its stimulus measure and it was indeed rather surprising. And as we’re also going to see in this post, it was surprising in the way that just might have done serious damage to not just the credibility of ECB President Mario Draghi but the ECB itself. Or at least credibility in the ECB’s commitment to its single mandate of keeping inflation hovering around 2 percent.

To placate the permahawks (to maintain credibility) or not placate the permahawks (to maintain credibility)? That is the question. Or at least one of the questions central banks face. Unfortunately.

********************

So the Fed finally did it: Fed rates rose for the first time in years from their near-zero levels. And while many in the financial markets cheered this historic day, it’s important to keep in mind that the underlying logic for raising rates isn’t really very strong based on the underlying macroeconomic landscape. In other words, if this wasn’t the right move, which folks like Paul Krugman think is the case, it was historic folly too [6]:

The New York Times
The Conscience of a Liberal

Fed Follies

Paul Krugman
Dec 16 4:01 pm Dec 16 4:01 pm 30

No, I don’t mean the decision to raise rates, although nothing I’ve seen changes my view that it’s a bad idea. I mean the desperate efforts to say something new about today’s move. I understand that there are strong journalistic incentives here, but it really is trying to squeeze blood from a stone.

After all, this move was completely telegraphed in advance; I guess there was some small chance that the Fed would wait, but really very little. Longer-term bond rates barely moved, showing that there was very little news.

And it will be quite some time before we have any evidence about whether the Fed’s judgement of the economy’s trajectory was right. (I think this was an ex ante mistake even if it turns out OK ex post, but it’s still interesting to see how it goes.) We’re talking months if not quarters, and it may take years.

I guess even the fact that the Fed succeeded in communicating its intentions is a kind of news story. But it’s pretty thin gruel.

“And it will be quite some time before we have any evidence about whether the Fed’s judgement of the economy’s trajectory was right. (I think this was an ex ante mistake even if it turns out OK ex post, but it’s still interesting to see how it goes.) We’re talking months if not quarters, and it may take years.”
Yep, the first Fed rate hike since 2006 was basically a big historic *yawn*. And perhaps a big historic mistake too given the delicate nature of the US’s economic recovery and extremely low levels of inflation.

But as Krugman points out, it’s going to take a while before the wisdom of this decision becomes apparent. And as former Treasury Secretary Lawrence Summers points out below, whether or not it was the correct move to do economically speaking, because the Fed had been strongly telegraphing this rate hike in the months leading up to this, it basically boxed itself in because when central banks strongly telegraph something, a sudden “surprise!” might have the impact of undermining the Fed’s credibility. Unfortunately, as Summers also points out, starting the Fed’s rate normalization at this point was probably also a mistake which isn’t exactly credibility-enhancing [7]:

LarrySummers.com
What Should the Fed Do and Have Done?

Larry Summers
12/15/2015

The Federal Reserve meets this week and has strongly signaled [8] that it will raise rates. Given the strength of the signals that have been sent it would be credibility destroying [9]not to carry through with the rate increase so there is no interesting discussion to be had about what should be done on Wednesday.

There is an interesting counterfactual discussion to be had. Should a rate increase have been so clearly signaled? If rates are in fact going to be increased the answer is almost certainly yes [10]. The Fed has done a good job of guiding expectations towards a rate increase while generating little trauma in markets. Assuming that the language surrounding the rate increase on Thursday is in line with what the market expects, I would be surprised if there are major market gyrations after the Fed statement.

But was it right to move at this juncture? This requires weighing relative risks. A decision to keep rates at zero would have taken several risks. First, since monetary policy acts only with a lag failure to raise rates would risk an overheating economy and an acceleration of inflation possibly necessitating a sharp and destabilizing hike in rates later. Second, keeping rates at zero would risk encouraging financial instability particularly if there became a perception that the Fed would never raise rates. Third, keeping rates at zero leaves the Fed with less room to lower rates in response to problems than it would have if it increased rates.

Finally, perhaps zero rates have adverse economic effects. Perhaps economic actors take the continuation of zero rates as evidence that the Fed is worried and so they should be as well. Some believe that zero rates are a sign of pathology and we no longer have a pathological economy and so no longer should have zero rates. Or perhaps there is a fear that when rates go up something catastrophic will happen and this source of uncertainty can only be removed by raising rates.

These arguments do not seem hugely compelling to me. Inflation is running well below 2 percent [11] and there is not yet much evidence of acceleration [12]. Decades of experience teaches that the Phillips curve can shift dramatically so reasoning from the unemployment rate to inflation is problematic [13]. Declining prices of oil [14] and other commodities suggest inflation expectations may actually decline [15]. Furthermore, if one believes that productivity is understated by official statistics one has to as a matter of logic believe that inflation is overstated. I have recently argued [16] that this is quite likely the case given the rising importance of sectors like health care where quality is difficult to measure.

Even if one assumes that inflation could reach 2.5 percent, this is not an immense problem. There is no convincing evidence that economies perform worse [17] with inflation marginally above 2 percent than at 2 percent. Then there is the question of whether it is better to target the annual rate of inflation or the price level [18]. On the latter standard [19] it is relevant that inflation over any multiyear interval would still have averaged less than 2 percent. And I am not sure why bringing down inflation would be so difficult if that were desired especially given that it would surely take a long time for expectations to become unanchored towards the high side of 2 percent.

It seems to me looking at a year when the stock market has gone down a bit, credit spreads have widened substantially [20] and the dollar has been very strong it is hard to say that now is the time to fire a shot across the bow of financial euphoria. Looking especially at emerging markets I would judge that under-confidence and excessive risk aversion [21] are a greater threat over the next several years than some kind of financial euphoria.

“It seems to me looking at a year when the stock market has gone down a bit, credit spreads have widened substantially [20] and the dollar has been very strong it is hard to say that now is the time to fire a shot across the bow of financial euphoria. Looking especially at emerging markets I would judge that under-confidence and excessive risk aversion [21] are a greater threat over the next several years than some kind of financial euphoria.
So similar to Paul Krugman’s take on matter, the way Larry Summers sees it, while the actual decision to signal this impending rate hike (which was based on the Fed’s internal decisions months ago) may not have been so great given the relative costs and benefits of a rate hike given the state of both the US and global economy, the Fed’s decision to raise rates today was indeed the correct one given the fact that not doing so would destroy the Fed’s credibility after all the Fed signaling.

Although it’s although worth noting that when Summer’s writes:


The Federal Reserve meets this week and has strongly signaled [8] that it will raise rates. Given the strength of the signals that have been sent it would be credibility destroying [9]not to carry through with the rate increase so there is no interesting discussion to be had about what should be done on Wednesday.

the September 23, 2013, Wall Street Journal article about “credbility destroying” central bank behavior Summers links to actually ironically describes a scenario when the Fed didn’t follow through on the expectations to scale back its QE program, citing lingering concerns over the health of the US’s recovery. And was its credibility damaged by that surprise? It’s hard to see any indication of that. Sure, most surveyed economists were expecting the Fed to reduce its bond buying at that point in 2013 based on the Fed’s guidance earlier in the year that the Fed’s QE programs might start getting scaled back in the Fall if the the recovery was deemed robust enough. And the Fed, now we know, didn’t view the recovery as robust enough and left the QE program intact. And as the WSJ article Summers linked to points out, conservative economists like the Fed’s then-board member Richard Fisher (a permahawk who wanted to end QE and raise rates at that point) were warning that such a “surprise” decision not to cut back QE would threaten the Fed’s credibility. But the market’s response to the following two years of extended QE didn’t exactly reflect a loss of “credibility” and given the lack of inflation and still fragile economic recovery, it’s hard to argue that mildly ‘surprising’ the markets wasn’t the right thing to do. What’s more credibility damaging? Doing the right thing despite a mild ‘surprise’ factor or doing what the markets expect even when it’s the wrong move?

It’s a reminder that central bank credibility with respect to market surprises is partially dependent on how much the central bank’s prior signaling clashes with what it actually decides to do, but it’s also largely dependent on the economic credibility of the arguments for or against the bank’s decision. And when you consider that the permahawks like Richard Fisher have been consistently wrong for years [22], it’s also a reminder that it’s probably credibility-enhancing to surprise the segments of the market that are consistently wrong [9]:

The Wall Street Journal
Fed’s Fisher: Tapering Delay Threatens Credibility

By Ben Lefebvre
2:36 pm ET Sep 23, 2013

The Federal Reserve‘s failure to make the expected cut in its bond- buying programs calls the body’s credibility into question, Dallas Fed President Richard Fisher said in prepared remarks Monday [23].

The S&P 500 hit an all-time-high and 10-year Treasury note yields fell Wednesday after the Fed decided to postpone a widely expected reduction of its $85 billion-a-month bond buying. The tapering, as it is known in the market, was supposed to signal that the economy had improved enough that the Fed felt confident start cut its bond buying by up to $10 billion a month.

By backing off the expected tapering, the Fed contradicted the message it had been sending to markets for months and has made future policy direction murkier, Mr. Fisher said during a speech to banking- industry representatives.

“Today, I will simply say that I disagreed with the decision of the committee and argued against it,” said Mr. Fisher in his speech. “Here is a direct quote from the summation of my intervention at the table during the policy ‘go round’ when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: ‘Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.’ I believe that is exactly what has occurred, though I take no pleasure in saying so.”

The market’s reaction showed that the Fed’s need to reform its communications policy, possibly by holding post-meeting press conferences more frequently, Mr. Fisher said.

“You should never wink at a girl in the dark,” Mr. Fisher said. “Our communications policy is a little off–we should work harder to refine it.”

The Fed would continue discussing tapering its bond buying and possibly reduce purchases of both Treasurys and mortgage-backed securities, Mr. Fisher said. The decision against starting it sooner came partly because of a perceived “tenderness” in an otherwise strong housing recovery, Mr. Fisher said.

Mr. Fisher, a non-voting member of the board, is opposed to continued bond buying by the Fed. He is also against the Fed’s continued policy of rock-bottom interest rates, something favored by Janet Yellen, the favorite to replace outgoing Fed Chief Ben Bernanke.

“She’s wrong on policy, but she’s a darn good, decent wonderful person,” Mr. Fisher said.

Mr. Fisher also took issue about how the White House floated the name of Lawrence Summers as someone to replace Mr. Bernanke because it threatened to draw the independent Federal Reserve Board into the realm of politics. Mr. Summers withdrew his name as a candidate after a backlash from senators.

“The White House has mishandled this terribly,” Mr. Fisher said. “This should not be a public debate.”

The Fed remains wary that the U.S. economy, while showing steady improvement, is still not strong enough for the central bank to start scaling down its efforts to spur stronger growth, Federal Reserve Bank of New York President William Dudley said earlier in the day.

….

“The S&P 500 hit an all-time-high and 10-year Treasury note yields fell Wednesday after the Fed decided to postpone a widely expected reduction of its $85 billion-a-month bond buying. The tapering, as it is known in the market, was supposed to signal that the economy had improved enough that the Fed felt confident start cut its bond buying by up to $10 billion a month.”
Well, at least the markets took the allegedly potentially credibility-damaging surpise Fed decision in stride. It’s a reminder that a surpise to the down side (i.e. keeping rates lower than expected) is inherently expansionary because lower rates are inherently expansionary (and contractionary policies are contractionary [24]). That’s just how finances works.

So how about the warning from now-retired Dallas Fed chairman Richard Fisher, one of the Fed’s biggest inflation-hawks? Was there a collapse in Fed credibility and a subsequent spike in inflation that Fisher so fears [25]?


“Today, I will simply say that I disagreed with the decision of the committee and argued against it…Here is a direct quote from the summation of my intervention at the table during the policy ‘go round’ when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: ‘Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.’ I believe that is exactly what has occurred, though I take no pleasure in saying so.

That was the warning, but it’s hard to see any evidence of that damage to the Fed’s credibility given the fact that markets weren’t continually predicting a surprise rate hike following the Fed’s assurances that rates would stay low until the economy picked up and/or inflation spiked. It’s another reminder that central bank surprises are far more likely to be credibility damaging if they turn out to be economically damaging and ill advised too and if the people being ‘surprised’ have a decent prediction track record.

Accurate forecasting is hard. Persistently inaccurate forecasting is a lot easier, although creativity will be required.
Interestingly, following this intra-Fed kerfuffle, in April 2014, Richard Fisher actually came out against the whole concept of central banks providing forward guidance (i.e. publicly stating the medium-term policy biases like assuring markets that rates would probably stay low for the new few years until employment and inflation objects are achieved). Instead, Fisher argued that forward guidance was pointless because “those who think we can be more specific in stating our intentions and broadcasting our every next move with complete certainty are, in my opinion, clinging to the myth that economics is a hard science and monetary policy a precise scientific procedure rather than the applied best judgment of cool-headed, unemotional decision-makers” [26]:

The Wall Street Journal

Fed’s Fisher Says Limits to Fed Forward Guidance

By Michael S. Derby

6:37 am ET Apr 4, 2014

Federal Reserve Bank of Dallas President Richard Fisher said Friday that what the central bank can say about the future of monetary policy is more limited than many recognize.

Those who think we can be more specific in stating our intentions and broadcasting our every next move with complete certainty are, in my opinion, clinging to the myth that economics is a hard science and monetary policy a precise scientific procedure rather than the applied best judgment of cool-headed, unemotional decision-makers,” Mr. Fisher said in the text of a speech to be delivered in Hong Kong.

Mr. Fisher was wading into the ongoing debate about what central bankers refer to as “forward guidance.” Most officials currently agree that providing guidance about the timing of future interest-rate increases can provide clear benefits to the economy now. By signaling that short-term rates will stay very low for well into the future, Fed officials believe short-term rates will stay low currently, providing additional support for the economy.

The power of forward guidance has grown in importance as the Fed has moved to wind down its asset-buying program over the course of this year. As the asset buying comes to an end, central bankers hope that their strong hints that interest rates will stay low will allow monetary policy to remain very supportive of growth, boosting hiring and pushing very low levels of inflation back up to the central bank’s target rate.

The manner in which the Fed guides views about the outlook for rate increases underwent a significant shift last month. Then, the Fed stopped providing numerical thresholds for the jobless rate and inflation that had to be met in order for rate increases to be considered. Now, Fed guidance is based on a broader array of factors that are more impressionistic in nature.

Mr. Fisher said, in his speech, the guidance the central bank now provides may need to be even simpler than it is currently stated so as to best reflect what central bankers truly know about the future path of policy. Currently, most central bankers reckon the Fed will first raise short-term rates some time in 2015 as long as the economic outlook plays out as expected.

Forecasts provided by the Fed are “largely guesswork, especially the further out in time they go,” Mr. Fisher said. When it comes to monetary policy, “commitments aren’t always credible, especially if they purport to extend far into the future.”

The Fed should tell markets what it knows, and little more. Mr. Fisher said the Fed should state it will conduct policy to achieve a sustained recovery, contained inflation, and financial stability. “Regardless of the way we may finally agree at the [Federal Open Market Committee] to write it out or have Chair [Janet] Yellen explain it at a press conference, we really cannot say more than that.”

Mr. Fisher noted that, in his past career as an investor, he would prefer as much certainty about the monetary policy outlook as central bankers can provide. But now that he is on the other side of the fence, he is not so sure.

Keep in mind that much of the criticism from inflation-hawks like Fisher towards the Fed’s low-rate policies comes from the strong assumption that high inflation is just around the corner unless rates are raised soon. So while Fisher does make a somewhat valid point when he states:


Forecasts provided by the Fed are “largely guesswork, especially the further out in time they go,” Mr. Fisher said. When it comes to monetary policy, “commitments aren’t always credible, especially if they purport to extend far into the future.”

it’s a somewhat ironic point coming from a perma-inflation hawk. But an ironically valid point can still be a valid point and Fisher’s ironically valid point highlights a key aspect of central bank decision-making that’s often forgotten in these debate: Since it’s very possible that the economic forecasts can go awry, one of the biggest questions facing policy-makers [27] is “on what side should we err?” In other words, since it’s very possible that a central bank’s predictions may not pan out, what are the relative costs and benefits of being wrong for the different policy options? And in this case, with rates at levels where they can only go up or hold near zero, it’s a question of what are the likely cost/benefit to being wrong if a rate hike is premature vs being overly delayed?

And as we saw above, for perma-inflation hawks like Fisher, that answer isn’t simply the risk of inflation if rates aren’t raised soon, but also the risk of a loss of credibility. And as Fisher put it in March of this year when the timing of the first rate rise was still under debate, the decision isn’t simply between “later and steep” (i.e. delaying a rate rise, but then having to raise rates quickly, presumably to ward off inflation) or “earlier and gradual” (i.e. raising rates right away under the assumption that doing so will spread out the inevitable rate rise over a longer period of time). It’s very possible, in Fisher’s view, that if the Fed decides to delay the rate rise until later in the year (which it did), the public might interpret that as indicating that the Fed is generally “dovish” and disinclined to raise rates in general. In other words, a “later and gradual” scenario. And according to Fisher a “later and gradual” Fed sentiment would be credibility damaging. Who knows why exactly that would be credibility damaging, but if you’re a perma-inflation hawk “later and gradual” is for some reason credibility destroying [28]:

Fast FT
Fed’s Fisher: delaying rate rise risks credibility

March 9, 2015

The US Federal Reserve risks losing its credibility if it doesn’t soon embark on the first rise in official interest rates since the financial crisis, a senior policymaker has warned.

Pushing back a rise in its overnight lending rate until much later in the year or to early 2016 will lead investors to question whether there is any appetite at the Fed to tighten policy, according to Richard Fisher, the retiring president of the Dallas Federal Reserve.

The Fed is instead, Mr Fisher argues, better off with an “earlier and gradual” approach to raising rates. In a speech in Houston on Monday, the policymaker said:

The credibility of a “later and steep” policy strategy is suspect, it seems to me. Isn’t it possible— even likely—that the public will interpret a decision to defer liftoff as a signal that the committee is generally “dovish” and generally disinclined to raise rates?

In other words, mightn’t the public see the choice as between “earlier and gradual” and “later and gradual” rather than between “earlier and gradual” and “later and steep”?

One of the most colourful speechmakers at the Fed, Mr Fisher has argued for more than a year that the dangers of delaying an increase outweigh any risks attached to doing so.

Yep, if the markets percieve a “later and gradual” bias at the Fed, somehow that’s credibility damaging according to Mr. Fisher because it might “lead investors to question whether there is any appetite at the Fed to tighten policy”. And notice that there isn’t even the typical (and wrong) warning of an inflation spike [29]. It’s an assertion looking for a justification, and a great example of a phenomena that Paul Krugman often rails about when it comes to the inflation hawks: their endless creativity in developing questionable justifications for a rate hike [30]:

The New York Times
The Conscience of a Liberal
The Creativity of the Permahawks

Paul Krugman
September 19, 2015 9:46 am

Tim Taylor writes about low interest rates [31]. As he notes, many economists see low rates as a natural (in both the colloquial and Wicksellian sense) response to a weak economy; but he respectfully cites the Bank for International Settlements [32], which argues that low rates are a source of terrible economic distortions. But it seems to me that there’s some context missing.

Taylor writes,

Notice that none of the BIS concerns are about the risk of a rise in inflation–which it does not think of as a substantial risk.

Ah, but it used to think otherwise. It has been calling for higher interest rates for around 5 years, and at first it was indeed warning about inflation. In its 2011 report [33], in fact, it declared that

Highly accommodative monetary policies are fast becoming a threat to price stability.

That was dead wrong, and the ECB — which believed in the inflation threat and raised rates — clearly made a big mistake. So you might have expected the BIS to ask why it was so wrong, and reconsider its policy recommendations. Instead, however, it continued to demand the same policies, while inventing new justifications.

And I mean inventing. As I’ve written many times, the remarkable thing about policy since 2010 is that outsiders, particularly bearded academics, have based their criticisms of policy on mainstream, textbook economics; whereas serious-sounding bankers in suits have been creating whole new economic doctrines on the fly to justify what they claim are sound policies.

In this case, the BIS not only claims that low interest rates cause financial instability, but goes on to expound a sort of widow’s cruse [34] theory of interest rates, in which low rates today lead to even lower rates tomorrow, because they produce bubbles that weaken the economy further when they burst. That’s pretty wild stuff; you wouldn’t want to take it seriously without a lot of evidence, which the BIS does not provide.

Or put it this way: if, say, Jeremy Corbyn or Bernie Sanders were to invent whole new, dubious economic theories to justify the policies they clearly want for other reasons, everyone would be coming down on them hard for being flaky and irresponsible. Yet when the BIS — which was, once again, dead wrong on inflation — does the same thing, it’s taken very seriously.

Again, if someone from the center-left were to produce an economic analysis this tendentious, this much at odds with decades of mainstream economics, it would be met with incredulity. It’s awesome to see the ultra-respectable BIS go down this path, and be taken seriously along the way.

Yes, after years of warning that low interest rates would cause an inflation spike , the right-wing Bank of International Settlements shifted gears this September and made the case that low interest rates would basically perpetuate themselves by cause financial bubbles that necessitate even lower rates in the future after the bubble bursts:


In this case, the BIS not only claims that low interest rates cause financial instability, but goes on to expound a sort of widow’s cruse [34] theory of interest rates, in which low rates today lead to even lower rates tomorrow, because they produce bubbles that weaken the economy further when they burst. That’s pretty wild stuff; you wouldn’t want to take it seriously without a lot of evidence, which the BIS does not provide.

Or put it this way: if, say, Jeremy Corbyn or Bernie Sanders were to invent whole new, dubious economic theories to justify the policies they clearly want for other reasons, everyone would be coming down on them hard for being flaky and irresponsible. Yet when the BIS — which was, once again, dead wrong on inflation — does the same thing, it’s taken very seriously.

Is the the Bank of International Settlements coming up with bogus theories to justify bad policy that’s not in the public’s interest? Well, it certainly wouldn’t be the first time [35] the institution acted against the public interest.

Short-term personal financial incentives and a desire for wage suppression also assist in persistent inaccurate economic forecasting
And if the BIS is indeed engaging in permahawk puffery, it’s also worth noting another key point Paul Krugman made regarding the compulsion to raise rates no matter what the circumstances: while doing so may not be in the public interest, there are some extremely influential private interests where higher rates are great for the bottom line [36]:

The New York Times
The Conscience of a Liberal

Rate Rage

Paul Krugman
September 19, 2015 1:51 pm

OK, I should have seen that one coming, but didn’t: the banking industry has responded to the Fed’s decision not to hike rates with a primal cry of rage. And that, I think, tells us what we need to know about the political economy of permahawkery.

The truth is, I’ve been getting this one wrong. I’ve tried to understand demands that rates go up despite the absence of inflation pressure in terms of broad class interests. And the trouble is that it’s not at all clear where these interests lie. The wealthy get a lot of interest income, which means that they are hurt by low rates; but they also own a lot of assets, whose prices go up when monetary policy is easy. You can try to figure out the net effect, but what matters for the politics is perception, and that’s surely murky.

But what we should be doing, I now realize, is focusing not on broad classes but on very specific business interests. In particular, commercial bankers really dislike a very low interest rate environment, because it’s hard for them to make profits [37]: there’s a lower bound on the interest rates they can offer, and if lending rates are low that compresses their spread. So bankers keep demanding higher rates, and inventing stories [30] about why that would make sense despite low inflation.

So the demand for higher rates is coming from a narrow business interest group, not the one percent in general. But it’s an interest group that has a lot of clout among central bankers, because these are people they see every day — and in many cases are people they will become once they go through the revolving door. I doubt there’s much crude corruption going on at this level (or am I naive?), but officials at public monetary institutions — certainly the BIS, but also the Fed — are constantly holding meetings with, having lunch with, commercial bankers who have a personal stake in seeing rates go up no matter what the macro situation.

Like everyone, the bankers no doubt are able to persuade themselves that what’s good for them is good for America and the world; more alarmingly, they may be able to persuade officials who should know better. Does this explain the puzzling divergence between the views of Fed officials and those of outsiders like Larry Summers (and yours truly) who have a similar model of how the world works, but are horrified by the eagerness to raise rates while inflation is still below target?

I don’t know about you, but I feel that I’m having an Aha! moment here. Oh, and raising rates is still a terrible idea.

“So the demand for higher rates is coming from a narrow business interest group, not the one percent in general. But it’s an interest group that has a lot of clout among central bankers, because these are people they see every day — and in many cases are people they will become once they go through the revolving door. I doubt there’s much crude corruption going on at this level (or am I naive?), but officials at public monetary institutions — certainly the BIS, but also the Fed — are constantly holding meetings with, having lunch with, commercial bankers who have a personal stake in seeing rates go up no matter what the macro situation.
Constantly holding meetings with, having lunch with, commercial bankers who have a personal stake in seeing rates go up no matter what the macro situation probably isn’t the best policy-making environment. But if Krugman’s analysis is correct, one of the most powerful and influential industries on the planet, commercial banking, has a strong financial incentive to see a Fed that’s ready and willing to err on the side of not just “soon but gradual”, as Richard Fisher might put it, but maybe even “soon and steep”. It’s a rather alarming conflict of interest.

And as Richard Fisher informed us back in September of 2014, it may not just be commercial bankers that would want to see rates rise sooner rather than later. It might be anyone that’s
worried about rising wages [38]:

FX Street
Fed’s Fisher: Fed Must Weigh Wage Pressures

MarketPulse
Mon, Sep 29 2014, 03:07 GMT
by Stuart McPhee | MarketPulse

The Federal Reserve mustn’t “fall behind the curve” as it weighs when to start raising interest rates, Dallas Fed President Richard Fisher said, citing strengthening U.S. growth and building wage-price pressures.

Fisher, a vocal advocate for tighter monetary policy to protect against inflation, also said today that two soon-to-be-released economic reports from his Fed district would “knock your socks off.”

“I don’t want to fall behind the curve here,” Fisher said in a Fox News interview. “I think we could suddenly get a patch of high growth, see some wage-price inflation, and that is when you start to worry.”

“I think we could suddenly get a patch of high growth, see some wage-price inflation, and that is when you start to worry.”
Uh oh! If we don’t raise rates soon we might “suddenly get a patch of high growth” and then *gasp* wages might rise. Nooooo! [39]

ECB’s “Life Off!” of 2011. And subsequent cratering.
So, as we’ve seen, while the recent Fed rate hike may not have been the best decision at the point given the tepid nature of the economic recovery thus far, the decision to raise rates could have been far worse in the sense that it could have come a lot sooner. How much worse? Well, as Krugman reminded us above:


Taylor writes,

Notice that none of the BIS concerns are about the risk of a rise in inflation–which it does not think of as a substantial risk.

Ah, but it used to think otherwise. It has been calling for higher interest rates for around 5 years, and at first it was indeed warning about inflation. In its 2011 report [33], in fact, it declared that

Highly accommodative monetary policies are fast becoming a threat to price stability.

That was dead wrong, and the ECB — which believed in the inflation threat and raised rates — clearly made a big mistake. So you might have expected the BIS to ask why it was so wrong, and reconsider its policy recommendations. Instead, however, it continued to demand the same policies, while inventing new justifications.

Yep, back in 2011 the whole world received an informative lesson in what happens when central banks prioritize inflation fears over the macroeconomic realities compliments of the European Central Bank (ECB). In was March of 2011, when the eurozone was still in the grips of a major sovereign debt crisis and just barely clawing its way out of one of the nastiest recessions its in recent memory, the ECB issued some forward guidance to the markets: In order to ensure inflation doesn’t rise about 2 percent (it’s target rate), and doesn’t result in rising wages, the ECB was willing to raise rates. Repeatedly. And part of the rational was based on the ECB’s newly higher projections of 2.3 percent for the year, up from an earlier prediction of 1.8 percent. And since the ECB has a single mandate of keeping inflation below 2 percent, that new projection of 2.3 percent inflation was apparently enough of a justification to raise rates in the midst of major economic distress. Needless to say, the markets were rather surprised (not in a good way) [40]:

Bloomerg Business
Trichet Says ECB May Raise Rates, Show ‘Strong Vigilance’

By Christian Vits and Jana Randow
March 3, 2011 — 11:23 AM CST

European Central Bank President Jean-Claude Trichet said the ECB may raise interest rates next month for the first time in almost three years to fight mounting inflation pressures.

An “increase of interest rates in the next meeting is possible,” Trichet told reporters in Frankfurt today after the central bank set its benchmark rate at a record low of 1 percent for a 23rd month. “Strong vigilance is warranted,” he said, adding that any move would not necessarily be the start of a “series.”

The comments surprised economists and investors, most of whom hadn’t expected the ECB to raise rates before August. The euro jumped more than 0.9 percent to $1.3976, the highest since November. German government bonds, a benchmark for Europe, dropped, sending the yield on the two-year bund 18 basis points higher to 1.713 percent.

Trichet is signaling tighter policy at a time when Ireland and Greece are struggling to cope with the terms of last year’s European Union bailouts and governments are hammering out a plan to draw a line under the crisis. The danger is that raising rates to tackle inflation will exacerbate the financial tensions that still run through euro region bond markets.

‘The ECB Will Hike’

“The ECB will hike rates by 25 basis points in April and I wouldn’t be surprised to see another increase in September or October,” said Natascha Gewaltig, chief European economist at Action Economics in London, who forecast before today’s meeting that the ECB would tighten policy in the first half. “Inflation expectations are picking up, that’s a clear signal for rate setters.”

The ECB is concerned about so-called second-round effects, when companies raise prices and workers demand more pay to compensate for soaring energy and food costs, entrenching faster inflation. Crude oil surged above $100 a barrel last week amid political tensions in the Middle East and North Africa. Euro-area inflation accelerated to 2.4 percent last month.

“There is a strong need to avoid second-round effects,” Trichet said, calling for moderation from wage and price setters. The ECB is “prepared to act in a firm and timely manner.”

He signaled any rate move would likely be a quarter-point step, saying a bigger increase would not be appropriate in his view. A rate increase in April would put the ECB ahead of its U.S. and U.K. counterparts.

Federal Reserve

Federal Reserve Chairman Ben S. Bernanke said on March 1 that the surge in oil and other commodity prices probably won’t cause a permanent increase in broader inflation and repeated that U.S. borrowing costs are likely to stay near zero.

The Bank of England may be moving closer to raising its key rate from 0.5 percent, with three of its nine policy makers voting for an increase last month.

China on Feb. 8 raised rates for the third time since mid-October to curb inflation and prevent its economy from overheating.

The ECB today raised its inflation and growth forecasts.

Inflation will average 2.3 percent this year, up from a December forecast of 1.8 percent and in breach of the ECB’s 2 percent limit, before slowing to 1.7 percent in 2012, the projections show. The 17-nation euro-area economy will expand 1.7 percent this year and 1.8 percent next, up from previous forecasts of 1.4 percent and 1.7 percent, according to the ECB.

Debt Crisis

At the same time, Europe’s debt crisis is far from over, with politicians yet to agree on new steps to bolster the region’s rescue fund.

While governments are cutting spending to rein in deficits, risk premiums for Spain, Portugal and Italy have increased since a Feb. 4 EU summit that failed to endorse an economic competiveness plan proposed by Germany and France as a condition for aid.

“The ECB is preparing to raise rates too early,” said Julian Callow, chief European economist at Barclays Capital in London. “It should give the euro-area economy more chance to get on a sustainable footing, particularly since it is still too early to tell how the intense fiscal consolidation in many countries will affect demand this year and next.”

“The sovereign debt crisis would have to intensify significantly for the ECB to delay the start of the rate hiking cycle,” he said. “The message from today’s meeting is clear: with inflation risks crystallizing, the ECB stands ready to act in April.”

“The ECB is concerned about so-called second-round effects, when companies raise prices and workers demand more pay to compensate for soaring energy and food costs, entrenching faster inflation. Crude oil surged above $100 a barrel last week amid political tensions in the Middle East and North Africa. Euro-area inflation accelerated to 2.4 percent last month.”
An inflationary spiral is just around the corner if rates are raised soon! Watch out! At least that was the warning from the ECB, along with this bit of forward guidance:


“The sovereign debt crisis would have to intensify significantly for the ECB to delay the start of the rate hiking cycle,” he said. “The message from today’s meeting is clear: with inflation risks crystallizing, the ECB stands ready to act in April.”

And sure enough, following a rate hike in April [41] and another in July [42], the sovereign debt crisis intensified significantly and the ECB, while continuing to warn of future inflation, decided to delay further rate hikes [43]:

The Economist

The ECB realises inflation may not be Europe’s biggest worry just now

Aug 4th 2011, 14:06 by R.A. | WASHINGTON

IT REALLY is difficult to overstate the extent of the European Central Bank’s failure in recent months. Earlier this year, headline inflation rose in Europe behind rising commodity prices. The Bank of England and the Federal Reserve considered the increase in inflation, looked at emerging market efforts to tighten policy, tightening fiscal conditions in their economies, and general economic weakness and concluded that the bump would be short-lived. It’s not going too far to say that it was obvious it would be short-lived. But the ECB apparently suffers from a severe case of central-bank myopia, and so it responded to higher headline inflation with an April interest rate increase, despite the vulnerability of the euro-zone economy, and despite an extremely serious ongoing euro-zone debt crisis.

Since that time, commodity prices have dropped, just as everyone expected they would. Inflation has eased; in the euro zone, producer prices indicate that it’s come to a screeching halt. Meanwhile, much of the euro zone is facing a return to recession. Industrial production is contracting across southern Europe. And the euro zone is on the precipice of an existential crisis. Italian stocks have fallen nearly 30%. Spanish stocks are down 20%. Even German shares are off 13%. Oh, and did I mention that the ECB raised rates again just last month?

Having driven the euro zone to the brink of collapse, the ECB is seemingly happy to let someone else push the economy over the edge. In today’s monetary policy announcement, the central bank continued to warn about inflation but opted not to raise interest rates yet again. The ECB may also resume purchases of bonds to try and maintain function in sovereign-debt markets and limit rises in bond yields. It hardly matters at this point; the damage has been done. European markets continue to drop, and bond yields continue to edge upward. It will take massive government intervention to stem the crisis, and even if euro-zone governments succeed there is a risk the euro-zone economy will follow its peripheral members into recession. If the euro zone does fall apart, a fitting epitaph might read, “The ECB feared 3% inflation”.

What would indeed be a fitting epitaph:

If the euro zone does fall apart, a fitting epitaph might read, “The ECB feared 3% inflation”.

And yet, despite the ECB’s lingering inflation-phobia, the economic realities forced it to “surprise” the markets in November of that year with a rate cut under the new leadership of today’s ECB president Mario Draghi [44]. And was we now know, the sovereign debt crisis continue to get worse, leading to the historic declaration by Draghi in July of 2012 to “do whatever it takes” to keep the eurozone financial markets and sovereign debt markets held together [45], embarking the ECB on the path towards quantitative easing, near-zero interest rates, and the kinds of policies that the inflation-hawks and Ordoliberals at the Bundesbank fear so much. To put it another way, by listening to the inflation hawks in 2011, the ECB bungled things up so badly that, by the mid-2012, the ECB was forced to become the kind of central bank folks like Richard Fisher hate. It was either that or let the eurozone implode.

The ECB’s mini-coup surprise of 2015. It wasn’t exactly credibility-enhancing.
And that brings us to another episode in credibility-damaging central bank behavior: While the Fed’s historic rate hike was getting much of the attention of late among central bank watcher, the Fed wasn’t the only major central bank making decisions this month. Specifically, the ECB’s recent decisions on how much to expand its QE stimulus programs ended up sending a very disturbing signal to the markets. But the credibility damage, while similar in ways to the warnings of from folks like Richard Fisher that not meeting market expectations based on forward guidance made months ago could damage a central bank’s credibility, was actually quite different. As we saw with Richard Fisher’s warnings in 2013, the damage to the Fed’s credibility was supposed to arise from the fact that the forward guidance the Fed gave earlier in the year suggested that rate hikes could be coming later in the year assuming the recovery stayed on track, and by not following through with predicted rate hike, the markets would be less likely to believe the Fed later (despite that fact that hiking rates in the fal 2013 could have been a really stupid thing to do).

But what happened with the ECB this month was actually quite different. In this case, ECB President Mario Draghi made a number of comments to the markets in the weeks and days before the ECB’s December policy-making decisions that further QE measures were probably forth coming, in keeping with his “do whatever it takes” pledge from 2012 and the overall weakness of the eurozone recovery. And then credibility problem arose: Mario Draghi was overruled by the inflation hawks [46]:

Reuters
ECB anti-climax takes shine off Draghi

FRANKFURT | By John O’Donnell
Fri Dec 4, 2015 11:52pm IST

Mario Draghi’s knack of aiming high and then fulfilling expectations did not quite come off on Thursday, raising a question mark over how much the European Central Bank and its president can be expected to act in future.

Although he is the head of the central bank, Draghi relies on consensus-building among the 19 countries in the euro zone, from conservative Germany to debt-strapped Italy, to mould policy, a task he has previously deftly managed.

This time, however, his announcement of a range of measures to enhance money-printing fell short of what investors had hoped for, prompting some to question whether Draghi is losing his magic touch.

“There was a build up of expectations based on Draghi’s strong track record of overcoming political opposition,” said Lena Komileva of consultancy G+ Economics.

“By wrong-footing the markets, the ECB has lost some credibility. It renews concerns about political divisions.”

Since the run-up to the launch of full-scale money-printing, Draghi has established a pattern of publicly talking up prospects of action, backing skeptics such as Germany into a corner and winning the majority of ECB governors for his plan.

His powers of persuading market skeptics were most famously demonstrated in 2012 when he promised to do “whatever it takes” to shield the euro, instantly quelling speculation that a debt crisis could bring about the collapse of the currency.

Yet on Thursday, Draghi’s words were not, in the eyes of investors, matched with the action some felt he had promised.

As recently as late November, Draghi had underlined the need for “the economy … to move back to full capacity as quickly as possible”, discussing the need for a possible recalibration of ECB support and warning of the bloc’s modest prospects.

Shortly afterwards, a rare public split emerged on the six-person Executive Board, when Sabine Lautenschlaeger from Germany said she opposed an extension of money-printing.

While there have long been differing views on the bank’s 25-member Governing Council, which sets interest rates, it was unusual for divisions on the Executive Board, which is at the core of ECB decision-making, to spill into the open.

There is no public record of Germany’s stance at the meeting on Thursday, the recalibration, when it came, was indeed a smaller-than-expected increase in the charge on banks for depositing money with the ECB.

Its one-trillion-euro-plus money printing program was extended by six months. That increases its size by roughly one third but there is no top-up to monthly buys. Municipal or regional debt will be included in the ECB’s bond-buying shopping list although Draghi could not yet say how much this would mount to.

“My understanding is the markets expected some changes which were not forthcoming,” Federal Reserve Chair Janet Yellen told United States’ lawmakers.

That was perhaps an understatement given the market reaction: European shares suffered their biggest fall in three months while and the euro leapt more than 2 cents, its biggest surge since March.

“The market’s disappointment is important for the future,” said Toby Nangle of asset manager Columbia Threadneedle. “It limits President Draghi’s ability to guide markets who will naturally become more suspicious of his power to deliver.”

For once put on the defensive by journalists pressing him abut the disappointed market reaction, Draghi was at pains to point out that further action was possible and that markets would understand better the ECB moves on closer inspection.

“The market’s disappointment is important for the future…It limits President Draghi’s ability to guide markets who will naturally become more suspicious of his power to deliver.”
That’s a pretty good way to put it. When Draghi implied much more aggressive measures than he actually delivered just days before the new policies were announced, that certainly didn’t help his credibility and therefore the credibility of the entire ECB. And the public spat with Germany’s member of the ECB’s executive council didn’t help either:

Since the run-up to the launch of full-scale money-printing, Draghi has established a pattern of publicly talking up prospects of action, backing skeptics such as Germany into a corner and winning the majority of ECB governors for his plan.

His powers of persuading market skeptics were most famously demonstrated in 2012 when he promised to do “whatever it takes” to shield the euro, instantly quelling speculation that a debt crisis could bring about the collapse of the currency.

Yet on Thursday, Draghi’s words were not, in the eyes of investors, matched with the action some felt he had promised.

As recently as late November, Draghi had underlined the need for “the economy … to move back to full capacity as quickly as possible”, discussing the need for a possible recalibration of ECB support and warning of the bloc’s modest prospects.

Shortly afterwards, a rare public split emerged on the six-person Executive Board, when Sabine Lautenschlaeger from Germany said she opposed an extension of money-printing.

Yeah, publicly dissing Draghi and then, lo and behold, the new ECB policies were basically a watered-down version of his planned stimulus expansion. It wasn’t exactly the best credibility builder for the ECB.

But it could be worse. And since this is the eurozone we’re talking about, it got worse. At least Mario Draghi’s credibility got worse when, later in the day, Bundesbank chief Jens Weidmann
announced his opposition to the watered-down stimulus and announced that below-target inflation is no reason for the central bank to do more [47]:

MarketWatch

Bundesbank’s Weidmann sets face against ECB moves

By Todd Buell

Published: Dec 4, 2015 2:16 a.m. ET

FRANKFURT–European Central Bank Governing Council member Jens Weidmann quickly voiced his opposition Thursday to new policy easing announced earlier in the day by the ECB, underscoring comments made earlier in the day by the ECB president that the Governing Council wasn’t united in pumping more money into the eurozone economy.

According to prepared remarks to be delivered in Frankfurt, Mr. Weidmann said that even though one shouldn’t casually ignore below-target inflation for the foreseeable future, this isn’t a reason for the central bank to do more.

“Considering the dominant role of the energy-price decline for the price development in the eurozone and earlier comprehensive monetary policy measures, that also can have risks and side effects, I did not believe a further loosening of policy was necessary,” he said.

Mr. Weidmann, who heads Germany’s Bundesbank, is considered one of the most outspoken hawks on the ECB’s 25-strong Governing Council. He opposed the creation of the current quantitative easing program and dissented against creating the bond program for stressed countries a little over three years ago.

Speaking last month, Mr. Weidmann also suggested that he opposed an expansion in the current bond-buying program.

“Mr. Weidmann said that even though one shouldn’t casually ignore below-target inflation for the foreseeable future, this isn’t a reason for the central bank to do more.”
So following what amount to a public mini-coup by the permahawks on the ECB, the chief permahawk, Jens Weidmann, announced that he doesn’t see sub-2 percent inflation as a reason for the ECB to do more. And keep in mind that, unlike the Federal Reserve which has a duel mandate of price stability (2 percent inflation) the ECB only has a single mandate: maintaining inflation below, but not too far below, 2 percent. That’s it. Also note the US permahawks like Richard Fisher think switching the Fed to a single mandate like the ECB (and ignoring unemployment completely) is an idea worth considering [48]. But apparently, according to Weidmann, even that single mandate should be ignored by the ECB at this point. And, again, the Weidmann wing just pulled off a public mini-coup at the ECB and then Weidmann declared that the ‘single mandate’ is really more of a ‘single suggestion’. What kind of damage will that do to the ECB’s credibility?

And this public smalck down of the ECB president all happened not long before the Fed made its historic decision to start the global “lift off” of near zero rates, which means that the permahawks at the ECB are going to probably be even more empowered to raise rates in the eurozone the higher the Fed’s rates go.. So assuming the Fed following through with its rate hiking forward guidance in 2016, we could be entering the kind of scenario next where where the ECB permahawks get an excluse to repeat their epic blunder of 2011.

“To the stars!” *ouch* “Seeing stars!”
So how likely is such a “Lift Off”/”crash down” scenario? Well, as Richard Fisher noted in 2014 [26], macroeconomic prognostications aren’t easy to do. Or at least do well. That said, based on a recent survey of economists, the Fed’s new “lift off” era might be cratering sooner than you think. Their evidence? All the other central banks that have tired to raise rates in recent years that only ended up trashing their recoveries and seeing those rates go right back down [49]:

The Wall Street Journal
Fed Officials Worry Interest Rates Will Go Up, Only to Come Back Down
More than half of economists polled predict federal-funds rate back near zero within next five years

By Jon Hilsenrath
Updated Dec. 13, 2015 7:16 p.m. ET

Federal Reserve officials are likely to raise their benchmark short-term interest rate from near zero Wednesday, expecting to slowly ratchet it higher to above 3% in three years.

But that’s if all goes as planned. Their big worry is they’ll end up right back at zero.

Any number of factors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting and slamming the economy, or lost momentum in a business cycle which, at 78 months, is already longer than 29 of the 33 expansions the U.S. economy has experienced since 1854.

Among 65 economists surveyed by The Wall Street Journal [50] this month, not all of whom responded, more than half said it was somewhat or very likely the Fed’s benchmark federal-funds rate would be back near zero within the next five years. Ten said the Fed might even push rates into negative territory, as the European Central Bank and others in Europe have done—meaning financial institutions have to pay to park their money with the central banks.

Traders in futures markets see lower interest rates in coming years than the Fed projects in part because they attach some probability to a return to zero. In December 2016, for example, the Fed projects a 1.375% fed-funds rate. Futures markets put it at 0.76%.

Among the worries of private economists is that no other central bank in the advanced world that has raised rates since the 2007-09 crisis has been able to sustain them at a higher level. That includes central banks [51] in the eurozone, Sweden, Israel, Canada, South Korea and Australia.

“They effectively have had to undo what they have done,” said Susan Sterne, president of Economic Analysis Associates, an advisory firm specializing in tracking consumer behavior.

The Fed has never started raising rates so late in a business cycle. It has held the fed-funds rate near zero for seven years and hasn’t raised it in nearly a decade. Its decision to keep rates so low for so long was likely a factor that helped the economy grow enough to bring the jobless rate down to 5% last month from a recent peak of 10% in 2009. At the same time, waiting so long might mean the Fed is starting to lift rates at a point when the expansion itself is nearer to an end.

Ms. Sterne said the U.S. expansion is now at an advanced stage and consumers have satisfied pent-up demand for cars and other durable goods. She’s worried it doesn’t have engines for sustained growth. “I call it late-cycle,” she said.

Several factors have conspired to keep rates low. Inflation has run below the Fed’s 2% target [52] for more than three years. In normal times the Fed would push rates up as an expansion strengthens to slow growth and tame upward pressures on consumer prices. With no signs of inflation, officials haven’t felt a need to follow that old game plan.

Moreover, officials believe the economy, in the wake of a debilitating financial crisis and restrained by an aging population and slowing worker-productivity growth, can’t bear rates as high as before. Its equilibrium rate—a hypothetical rate at which unemployment and inflation can be kept low and stable—has sunk below old norms, the thinking goes.

That means rates will remain relatively low even if all goes as planned. If a shock hits the economy and sends it back into recession, the Fed won’t have much room to cut rates to cushion the blow.

Normally in a recession the Fed cuts rates to stimulate spending and investment. Between September 2007 and December 2008 it cut rates 5.25 percentage points. Between January 2001 and June 2003 the cut was 5.5 percentage points, while from July 1990 to September 1992 it was 5 percentage points.

If the Fed wants to reduce rates in response to the next shock, it will be back at zero very quickly and will have to turn to other measures to boost growth.

Fed officials worry a great deal about the risk. The small gap between zero and where officials see rates going “might increase the frequency of episodes in which policy makers would not be able to reduce the federal-funds rate enough to promote a strong economic recovery…in the aftermath of negative shocks,” they concluded at their October policy meeting, according to minutes of the meeting.

In short, the age of unconventional monetary policy begun by the 2007-09 financial crisis might not be ending.

Note the critical paradox at work here: Whenever the Fed raises rates, it simultaneously creates a larger ‘cushion’ for future rate cuts that can be employed. But it also simultaneously slows down the economy, making a future rate cut more likely.

This paradox is part of why the larger global economic environment is critical in making historic decisions like raising near-zero rates after the longest period of no rate hikes in history. And that’s why the ECB’s mini-coup this month is potentially so significant to not just eurozone but everywhere else too: If the ECB repeats its blunder of 2011, maybe not by actually raising rates but analogously by scaling back its QE policies recklessly and generally signaling that the Weidmann-wing is calling the shots, that’s probably going to drag down the US and everyone else too and make the odds of see near-zero rates from the Fed a lot more likely.

So here we are, with the Fed quite possibly raising rates prematurely, and the ECB sending signals to the market that the Weidmann-wing of permahawks has the power it needs to overrule Mario “do whatever it takes” Draghi. But hey, prognosticating is hard and it’s certainly possible that the economy will indeed pick up as expected in 2016 and maybe this rate hike was prudent and well-time. And few things would enhance the credibility of the Fed or ECB better than a robust recovery in both the US and eurozone in the face of this historic “lift off” and a scaling back of the ECB’s stimulus programs.

On the other hand… [53]