By John Mauldin
When notified of an emergency like a high-rise fire, which could be either very serious or a mild annoyance, firefighters assume the worst . They arrive quickly and in force. The chief may release any unneeded trucks to go elsewhere, but they initially bring it all, “just in case.”
What they don’t do is stay on the scene after the emergency is over. They might leave a small crew to extinguish any flare-ups but they won’t tie up the entire department. It may be needed elsewhere.
Now imagine the Federal Reserve is our financial fire department. It got a 12-alarm call in March 2020 and rolled out every truck it had. That was the right response. But within a few months, or at most a few quarters later, it was clear the Fed’s part of the emergency was over.
COVID-19 wasn’t over, of course (and still isn’t), nor was the economy in a great position, but the systemic meltdown risk had passed. At that point, it was mainly a fiscal fire. Fire Chief Jerome Powell himself said so, repeatedly begging Congress to deal with unemployment and business failures more effectively.
Powell admitted there was little else his firetrucks could do…but he kept them there anyway in the form of massive quantitative easing and keeping rates at the zero bound. They are still on-scene now.
In my opinion this has the potential to go down as the greatest policy error in central bank history.
I know that’s saying a lot. Arthur Burns and G. William Miller letting inflation rise in the 1970s ranks up there. Alan Greenspan kept rates too low for too long. Failing to better regulate the mortgage industry was a major problem.
After the Great Recession ended, Powell’s predecessors Ben Bernanke and Janet Yellen also kept firetrucks on scene even though the crisis was over. In fact, they even sent additional trucks (QE2 etc.). But Powell is doing it on a vastly larger scale.
Fed is blocking traffic
This might be tolerable if these financial firetrucks were just parked and waiting. Instead, they’re blocking traffic. Their revved-up engines are spewing fumes, choking innocent bystanders. The highly skilled firefighters are actually losing their skills as the needless deployment consumes their training time.
Leaving rates /zigman2/quotes/211347041/realtime BX:TMUBMUSD01M +63.85% at the zero bound is financial repression. It harms savers and retirees. Buying $40 billion worth of mortgage bonds every month to hold down mortgage rates in the midst of an extraordinarily significant rise in housing costs seems counterproductive, especially for first-time buyers.
Even more egregious is the Fed seems to have assumed a third mandate: keeping the stock market /zigman2/quotes/210599714/realtime SPX -2.27% /zigman2/quotes/210598065/realtime DJIA -2.53% /zigman2/quotes/210598365/realtime COMP -2.23% rising. Not only does this exacerbate wealth disparity, it borders on malpractice because, at some point, the Fed will have to take its foot off the accelerator. When that happens the potential for another “taper tantrum” is significant.
The Fed absolutely should not think the stock market is its responsibility. To do so (as I believe they are) sets up all of us for extreme future volatility.
This has to stop. The economy is growing now. Unemployment, while still elevated, is improving. Creditworthy borrowers can easily get financing. Even if another major COVID-19 wave strikes, we have thankfully progressed beyond the need for economy-stifling restrictions.
The emergency is over. The Fed should bring its firetrucks home.