The Federal Open Market Committee will be gathering in earnest today, but this hotly-anticipated event now looks like a damp squib after Janet Yellen all but ruled out an immediate rate rise last week.
No doubt Fed watchers will revive their usual excitement and frenzy in the coming months, but a potential 0.25 per cent rise – with another to be considered at a later point – barely scratches the surface of what is needed to combat the asset price inflation disease that has dogged the global economy in recent years.
In reality, the material news in recent weeks with regard to US monetary policy has unfolded not at the Fed, but on the campaign trail.
We have known for some time that a Clinton administration would surely bring together a powerful economic team in favour of radical Keynesianism and enhanced financial regulation, with Yellen’s position as Fed chair reinforced (remember that senator Elizabeth Warren, a possible vice-presidential pick for Hillary Clinton, was a key player in Yellen’s original appointment).
For a while, the Trump campaign appeared to be adopting a different approach. Donald Trump has said he will not reappoint Yellen (her term expires in January 2018) as “she is not a Republican”; and a few months ago he claimed that she was keeping rates low to help the Democrats win the election, implicitly suggesting that they should be higher.
But this position has now been revised, and if Trump makes it through to the White House, we have every reason to assume that he will be a dollar devaluationist in the tradition of Richard Nixon or George W Bush (never mind his primary election assault on the Bushes).
Indeed, he recently told a CNBC interviewer that he agrees with the programme of holding rates low, adding: “I am the king of debt. I do love debt… I love the concept of a strong dollar. But when you look at the havoc that a strong dollar causes, and I can tell you, I have friends in China and they love to see it go up.”
What should market participants make of this? Since the financial crisis, the policy of low interest rates and quantitative easing has unleashed irrational forces in global asset markets which have corrupted the vital signalling function of financial market prices. It is unclear how long the present temporary stays against the progress of this disease – the Yellen put and the wave of Chinese-source speculation across the commodity complex – will continue to have any effectiveness.
The end result of the Great Monetary Experiment pursued by the Federal Reserve will be major asset price deflation and a recession, possibly in the coming quarters, unless an economic miracle occurs. The likely way of dealing with this downturn, vast Federal government pump-priming – whether under a Clinton or Trump presidency – accompanied by dollar devaluation may work some restorative “magic” in the markets from a much lower level than today. Yet there is also a scenario where this type of stimulus could be spectacularly unsuccessful.
The vanishing of any prospect of US monetary reform has almost certainly played some role in the decline of the dollar and rise of gold prices this year. How this continues to play out exactly is uncertain, but should the US face another recession within the next couple of years, one would expect market participants to greet any ensuing “stimulus” with a heavy dose of scepticism.