We love that cartoon on the front page of the latest Grant’s Interest Rate Observer. The drawing, by the newsletter’s Hank Blaustein, shows the Federal Reserve building, with a line suggesting someone is inside saying: “Hello, Ben? Now What?” It manages to say in four words what the Financial Times takes an entire editorial in this mornings edition to say, which is that the Fed and the central banks don’t seem to know how to get out of the morass into which Ben Bernanke beckoned them with all his forward guidance.
The FT calls the Bank of Japan the “latest central bank to spring a surprise,” because it just “went back on previous statements and cut interest rates to negative.” It also says the People’s Bank of China has been “attacked for botching its communication and worsening the slide in the renminbi, the fall in stock prices and continued capital flight from China.” It also quarrels with the European Central Bank for regarding “outright deflation as a necessary condition to expand the bank’s campaign of quantitative easing.”
“Credibility problems” is what the FT lays to the Federal Reserve. It cites the Fed’s failure to back off the idea that America’s labor market is “tightening” and that “inflationary pressures” are building up. It reckons investors “clearly do not believe” Fed officials when they forecast for this year another four quarter-point rises in interest rates. Remember when Mr. Bernanke was telling CBS: “We could raise interest rates in 15 minutes if we have to”? Assuming Mr. Bernanke is mortal, that could yet end up as his epitaph.
What the FT concludes from all this is that the “revolution” — as it puts it — in central banking that occurred in the 1990s and 2000s is incomplete. It draws from the Fed’s predicament that “greater clarity and communication do not prevent mistakes being made and credibility lost.” The FT should know, having cheered on Mr. Bernanke at every turn and belittled those who started talking about radical reform, like a restoration of sound money linked to gold. Still but meager mention of this in the mainstream press.
Even though — it’s incredible that this hasn’t registered in the press — the Senate of America came this month within a handful of votes of cloture on Audit the Fed. That measure, which has thrice passed the House (once, in September 2014, by a vote of 333 to 92), would return to the Congress the constitutional power it abjured years ago to oversee the formation of monetary policy. It would do this by empowering the Government Accountability Office to look at every conversation and minute and cable of the Fed. Mr. Bernanke issued an alarm about it in his blog at Brookings.
Grant’s itself suggests it’s time to repeal the Fed’s employment mandate and establish a rule, “First do no harm.” Almost an entire presidency has passed since the Great Recession began, and growth is now running at 0.7%. Unemployment has been brought down by people ceasing to look for work. The Fed balance sheet is still bloated by trillions. Maybe one of the Republican candidates — two of whom (Rand Paul and Ted Cruz) are co-sponsors in the Senate of Audit the Fed — will find a way to make the point. They could do a lot worse than put up billboards of Mr. Blaustein’s cartoon.