This has been a bad week for anyone hoping for a June hike… or even a 2015 hike. The week started out with Fed governor Lael Brainard introducing a new condition by which the Fed would gauge rate-hike readiness: The economy of the “world” needs to get better first.
It may be impossible for the Federal Reserve to raise interest rates until the rest of the world economy improves, Fed board member Lael Brainard said on Tuesday, in the most direct acknowledgement yet of how weak global markets could handcuff the U.S. central bank.
Then while stunned rate-hike watchers had barely caught their breath, Fed governor Bullard announced that the Fed would hike rates (and tank the world economy) only if and after the world economy stops looking like it’s tanking of it’s own accord:
“I would like to move on the back of good news, basically, and I think it’s very difficult to say that you’re trying to normalize interest rates just at the moment where the economy looks a little bit weaker”
So to sum up the week thus far: Bullard admitted that a rate hike would have the likely effect of ending the party (even though the party is apparently ending anyway). And Brainard is apparently waiting for some alignment of the planets to bring about a time when the economy of the entire world is perfect first.
Just when we thought there would be no more unintentional “Low Rates Forever” indicators in the form of self-limiting policy opinions from the world’s economic elite, here come’s Christine Lagarde via Bloomberg, who for some unknown reason feels that making public recommendations to the Federal Reserve is within her purview:
“We still believe that the underpinnings for continued expansion are in place,” IMF Managing Director Christine Lagarde said at a press briefing in Washington. “The inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months.”That means the Fed should wait until early 2016, even if there’s a risk of “slight overinflation”.
Overinflation? What’s that? We’re pretty familiar with economics here, but that’s a new one to us. Let’s check the Oxford Dictionary of Economics for “Overinflation”. No. Nothing there. How about Palgrave? Nothing there either. Investopedia?? Nope.
We have always known that Madame Lagarde was a cunning linguist, but this term appears to have been pulled from some nether region which we would rather not dwell upon.
For the time being, we will channel Ambrose Bierce and offer our modest attempt to divine what Lagarde probably means by “overinflation”.
Overinflation – \ˈō-vər-in-ˈflā-shən\
- Unlegislated taxation for the benefit of the oligarchy.
- A precision munition targeted directly at the middle class
- A state of increased gold repatriation.
Please let us know if we missed any other possible meanings.
The bigger picture: Foreign interests are rising
Something else needs to be noted about Lagarde’s unexpected appearance on the Fed policy stage: This makes two times in one week that the world economy has been brought to bear on US monetary policy recommendations. (The first being Brainard, mentioned above).
“Higher US policy rates could still result in significant US volatility with financial stability consequences that go well beyond the US borders. In weighing these risks, we think that there is a case for waiting to raise rates until there are more tangible signs of wage or price inflation then are currently evident. So in other words we believe that a rate hike would be better off in 2016. ” - Christine Lagarde
Not only is it historically unprecedented for the head of the IMF to make grand public declarations about what the Federal Reserve should and shouldn’t do — but the increasing tenor of foreign interests is noteworthy. Nowhere in the Federal Reserve’s mandate does the stability of emerging market banks appear. But “our girl” Lagarde seems to think emerging markets are so dependent on US created liquidity, (and by proxy, one presumes their ability to repay the IMF) that a public warning is warranted. We’ll follow this closely.
Lastly: Here are the talking heads: