The cool kids' table

"[Esther George] believed that by waiting longer to adjust the policy stance and deviating from the appropriate path to policy normalization, the Committee risked eroding the credibility of its policy communications."

"In addition, several expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for monetary policy."

Esther, Esther, you're never gonna sit at the cool kids' table if you go on like that.  Don't you know it's all about the decline in r* these days, and why the model says that if bond yields are low then the Fed's hands are tied?  And if the data says that you ought to put rates up, the only prudent policy option is to wait for some data that says you oughtn't?

Macro Man suggested yesterday that Dudley's comments on the possibility of a September rate rise might be the opening gambit of a bait 'n' switch, and so it's turned out to be thus far.   Yesterday morning saw some heavy selling of the US front end, only to see prices reverse after the Fed declined to set the table for a September meeting...or any other meeting, for that matter.  After the minutes there was a nice volte-face, with a candle suggesting more gains are in store.  This is the reason that Macro Man now keeps a toaster in his bathroom; plugging it in and throwing it into the bath is less painful than trying to short the US front end (though he did manage to take back half of his post payroll Fed funds short on Tuesday, however.)

It says everything you need to know about modern monetary policy that a speech that Alan Greenspan gave two decades ago mentioning "irrational exuberance" is still well remembered, yet similar concerns about today's valuations are primarily expressed by regional presidents and confined to the back end of the minutes.

As has been well telegraphed, this year's Jackson Hole conference is dedicated to "Designing resilient monetary policy frameworks for the future."   This is of course a laudable goal, although one does wonder if the current crop of central bankers is capable of achieving it.  A robust and stable system or framework is one that recognizes its limits, a characteristic that has not been notable in many modern central bankers.

Macro Man had to laugh when he saw a chart of the latest Wu-Xia policy rate for the Eurozone, pictured below (hat tip @fwred).  Now, one often hears the Wu-Xia model being cited in market circles, but Macro Man has grave doubts that many of the people citing it understand what it is doing.   What it does not do is look at the panoply of macroeconomic information and say "here's where rates should be."   Rather it uses forward rates as inputs.   Well, guess what?  Since the ECB moved to a negative depo rate, Eurozone forward rates have gone negative...which according to Wu-Xia means that rates should go even more negative!  In other words, the very policy easing actions of the ECB have, according to this model at least, rendered policy more restrictive than if they'd done nothing at all.

Now, this is not to say that the ECB or anyone else are taking Wu-Xia seriously as a prescriptive policy recommendation- at least we can hope not.   It does, on the other hand, clearly suggest that strange things happen when monetary policy enters the event horizon of ZIRP and NIRP.  It also, incidentally, suggests limits to the utility of models as inputs to policy and economic decision making, as well as the folly of letting policy being led by the nose by market pricing.

As one commenter said yesterday of the Fed, "no one wants to hike rates and be responsible for a crash."  Ironically, by doing nothing and letting  market pricing of some financial instruments get so silly, they all will be responsible for the next crash, whenever it may be.  In the meantime, they can sit at the cool kids' table and mock the nerdy worrywarts like the villains in an 80's teen flick.