(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Sept 21 Wednesday brought a double gift for risk
investors: the usual, as the Federal Reserve declined yet again
to raise rates, and the exotic, as the Bank of Japan declined to
carry on undercutting its financial sector.
The contrast between the supportive framework for asset
prices and the disappointing outcomes for the economies in
question is stark.
Japanese shares rose nearly 2 percent and bank
stocks leapt 7 percent after the BOJ not only
refrained from taking interest rates further into the negative
but pledged to steepen the yield curve. The S&P 500 rose
1.1 percent and the Nasdaq hit an all-time high after
the Fed remained on hold despite what it acknowledged as a
strong labor market.
Acknowledging the obvious, Japan abandoned its target of
raising inflation to 2 percent in two years, opting instead for
an open-ended commitment to keep doing what has not worked yet
until inflation rises above 2 percent.
The Fed, divided by a 7-3 vote, with the minority wanting a
25-basis-point hike now, appeared to be at cross purposes with
"The Committee judges that the case for an increase in the
federal funds rate has strengthened but decided, for the time
being, to wait for further evidence of continued progress toward
its objectives," the Fed said in its statement.
While the clear implication was of a rate hike soon, perhaps
at the first post-election meeting in December, this confidence
is hard to reconcile with its own projections, which show more
and more evidence that the Fed is buying into the narrative of
long-running secular stagnation.
The median projection for long-run economic growth in the
U.S. fell to 1.8 percent, marking the first ever such forecast
below 2 percent. The Fed also cut its projections for where
rates will end 2017 by half a point to 1.1 percent and by the
same amount for 2018 to 1.9 percent.
Note that not only do three FOMC members want rate hikes
now, there are three further whose "dot plot" estimate of
appropriate rates show they favor no hikes this year.
"The committee is more split than it has been at any time in
our memory. This split in views will make FOMC communication and
action increasingly difficult this year. In particular, we
believe that this level of dissent will make it difficult for
the committee to keep the possibility of a December rate hike
live in the minds of market participants and, indeed, households
and businesses," Michael Gapen and Rob Martin, economists at
Barclays, wrote in a note to clients.
The remarkable thing - and this applies both to the Fed and
the BOJ - is not the disagreement around policy but exactly how
radical it has been forced to become and remain.
Markets put the probability of a December hike at just above
50 percent, demonstrating scant confidence that the Fed will be
able to hike a second time even a full year after the first. Fed
Board member Lael Brainard's characterization last week of a
"new normal" in monetary policy in which the asymmetric risk of
an economic stall argues for only proceeding very slowly now
seems much closer to consensus than it would have been in past
Similarly, the BOJ, saying it will seek to blow its own 2
percent inflation target to the upside, is trying to appear
strategically irresponsible, willing to do the unthinkable for a
central bank in order to obtain the otherwise unobtainable
result of rising inflation expectations.
It isn't that it's wrong for the Fed to give labor a bit of
time to fatten at capital's expense, or for the BOJ to want
consumers to fear an inflation many have never known.
Both of these outcomes makes sense in the bizarre world
policy makers find themselves in, yet neither has a good track
record of working to achieve the goals of strong growth and
Both policy paths are also hugely supportive for asset
prices and risk, at least in the short to medium term. That
makes the best bet in all of this to be continued management of
monetary policy in a risk-friendly way. The Fed may not hike in
December and certainly will not if fallout from the election, or
other issues, leads to a market set-back.
The risks for the Fed are of turning Japanese, hamstringing
it from returning to normal. For the BOJ, as Japan is already in
a long malaise, there is no doubling back in the direction of
policy, only fine tuning.
Central bank decision days will continue to be a kind of
secular Christmas, with investors playing the role of kids.
(Editing by James Dalgleish)