The decision by the FOMC to hold fire on lifting interest rates at its September meeting has elicited all types of responses. Perhaps the most interesting is the one James Grant gave in an interview with Switzerland’s Finanz und Wirtschaft on Friday.
Grant, the editor of the well-known and widely followed Grant’s Interest Rate Observer publication, said that interest rates have been “muscled down” to super low levels so that the “portfolio balance channel” could help higher stock prices drive increased aggregate demand.
But he’s not impressed by these policies, telling F&W:
That was the theory of the Bernanke Fed and it certainly was the theory of the Chinese communists who sponsored the fly away levitation of the Shanghai A-shares. So the world over – and this goes for Europe as well – central bankers have taken it upon themselves to sponsor great bull markets in the hopes of making people spend more because they will feel richer. That was the theory. But they neglected to think through the full consequences of these policies.
Part of the problem Grant alludes to is the signalling impact of the Fed’s policy decisions, both in the 7 years since Lehman Brothers collapsed and the recent decision to pass on raising rates. Grant said he thought the Fed’s first move was important in that it would introduce the idea that “something in the way of a normal structure of interest rates” was coming.
“Here it is again: Seven years after the fall of Lehman the biggest and supposedly most dynamic, most resilient economy in the world is still not strong enough to absorb that. That is the message from the Fed. So no wonder the markets are worried,” he said.
But Grant saves his most telling criticism for Fed chair Janet Yellen, saying she’s too “anxious” to lead the Federal Reserve.
Here’s the question, and his answer from the interview:
F&W: Usually stocks rally when the Fed stays easy. Not this time. Is Fed Chair Janet Yellen still on top of things?
Grant: Here is a a very revealing fact: According to the Wall Street Journal when Janet Yellen goes to the airport to catch a flight she arrives hours early. Now, what does that tell you about her personality type? She’s really, really anxious. I think this is a personality type that perhaps is better suited not for high command. If a difficult decision needs to be taken a person who’s so anxious or so much of an impulsive risk minimizer is perhaps not the best qualified to take sometimes a leap into the dark. But that’s what investing and the management of money is everything about: At one point you have to take a leap in the dark because you can’t know the future. So this says a lot about a person who manages the world’s reserve currency without thinking of making too much of it.
How a person’s travel habits impact on their capacity to be a good Fed chair is an open question. Grant’s take on the Fed and other central bank policies clearly puts him in the camp that thinks central banks have overplayed their hand.
But what Grant does do is highlight the uncertainty that central bank policies have left markets in. If you can’t play the ball, then playing the man becomes the game.
No wonder it’s a sea of red across stock markets this week.
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