Once again, Ambrose Evans-Pritchard takes the
cake and points out something that otherwise would have been left unsaid –
that the FOMC must have room to drop rates in their idiotic Keynesian world.
Absent that, they can just pump QE by the trillions and buy up everything in
sight, which is probably the whole idea as we’ve pointed out in the past.
An ominous paper by the US Federal Reserve has become the
hottest document in high finance.
It was intended to reassure us that the world’s hegemonic
central bank still has ample firepower to overcome the next downturn. But the
author was too honest. He has instead set off an agitated debate, and rattled
a lot of nerves.
David Reifschneider’s analysis – ‘Gauging the Ability of the
FOMC to Respond to Future Recessions’ – more or less concedes that the Fed
has run out of heavy ammunition.
The Federal Open Market Committee had to cut interest
rates by an average of 550 basis points over the last nine recessions in
order to break the fall and stabilize the economy. It could not possibly do
so right now, or next year, or the year after. Quantitative easing (QE) in
its current form cannot compensate, and nor can forward guidance. They are
largely exhausted in any case.
“One cannot rule out the possibility that there could be
circumstances in the future in which the ability of the FOMC to provide the
desired degree of accommodation using these tools would be strained,” he
wrote.
This admission is painfully topical as a plethora of data
suggest that the US economy may have hit a brick wall in August. The ISM
gauge of manufacturing plunged below the boom-bust line to 49.4, and the
services index dropped to a six-year low, with new orders crashing nine
points.
My own tentative view is that these ISM readings are
rogue surveys. The Atlanta Fed’s ‘GDPNow’ tracker points to robust US growth
of 3.6pc in the third quarter. The New York Fed version is coming in at 2.8pc.
Yet the US expansion is already long in the tooth after
87 months, and late-cycle chemistry is notoriously unpredictable. Warning
signs certainly abound. Corporate profits have been slipping for six
quarters, the typical precursor to an abrupt slump in business spending. “The
only thing keeping the US out of recession is the US consumer. If consumption
stalls then we really are in trouble,” says Albert Edwards from Societe
Generale.