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Fed Starts To Walk Back Its Rate Hike. Next Step: More QE, Bigger Experiments

That didn’t take long. A month after the Fed’s dreaded quarter-point interest rate hike, the markets tank and out come the talking heads to promise that whatever is bothering traders, Daddy will make it right.

Falling inflation expectations could mean policy rethink: Fed’s Bullard

(Reuters) – The continued rout on global oil markets has caused a “worrisome” drop in U.S. inflation expectations that may make further rate hikes hard to justify, St. Louis Federal Reserve President James Bullard said on Thursday.

Since the dramatic fall in oil began in 2014 Fed officials have insisted the impact on U.S. price levels would be temporary, bottoming out at some point and allowing inflation to rise to the Fed’s 2 percent target.

Bullard said he has so far been willing to look beyond a slip in expectations as likely passing. But he is now worried the plunge in oil has unmoored inflation expectations as well, a fact that would make it more difficult for the Fed to lift inflation to its 2 percent target and could force officials to rethink the four quarter-point rate hikes expected this year.

“We are 18 months into this and I am starting to wonder if my story is the right one,” Bullard said. “For me inflation expectations are a key factor and if they continue to decline I would put increasing weight on that.”

He said he still thinks that continued strong job creation would “trump” weak inflation and a slowdown in the growth of gross domestic product. The outlook for four rate hikes still seems “about right,” Bullard said.

But, coming from a Fed member who argued for an earlier rate hike and who is considered to be on the hawkish end of the spectrum, Bullard’s comments reflect the depth of concern at the Fed that it may struggle to meet its inflation goal given the state of the global economy.

To sum up, if the world stays the way it currently is, interest rates will remain zero-ish. But since the world has gotten the way it is with rates at this level, just keeping them here doesn’t seem like much of a fix. So when today’s temporary post-Bullard pop fades and the global melt-down resumes, the response will be as follows:

1) Intimate that the Fed’s balance sheet has contracted enough and maybe it’s time for it to stabilize (translation: a new but modest round of QE).

2) When that fails, promise to expand the existing QE program by an amount calculated (via focus groups of hedge fund managers?) to turn the market’s frown upside down.

3) When that fails, begin a new experiment with a catchy name like “QE for the people” or “debt jubilee” or NIRP, featuring the helicopter money that Ben Bernanke long ago promised to deploy in case of full-blown deflation — along with a nice selection of capital controls to keep unruly savers, investors and other enemies of society in line.

At which point we’ll be so deeply into uncharted territory that prediction becomes pointless, except as a form of entertainment.

25 thoughts on "Fed Starts To Walk Back Its Rate Hike. Next Step: More QE, Bigger Experiments"

  1. Unfortunately a lot of people do not know they are not well of like they thought. There will be a lot of people coming out of retirement and postponing it.

  2. Wasn’t this the same monkey that was spouting off about how we were good to raise interest rates last month???

  3. At which point we’ll so deeply into uncharted territory that prediction becomes pointless, except as a form of entertainment.
    Don’t forget the leftist panem et circenses while you are at it!

  4. If inflation is what the Fed wants then perhaps Yellen ought to encourage a re-vote on the bill to audit the Fed that just failed. She sent Congress a letter before the vote and warned them that if the Fed is audited it may “trigger inflation expectations” (and it will be all Congress’ fault.)

    1. No, her warning was that she would not sell the bonds to fund the political promises of CONgress. The incestuous relationship between congress and their banksters will continue as long as you have career politicians. Vote EVERY incumbent out EVERY election to install defacto term limits, which will never be proactively passed.

      1. Japan sells its garbage bonds to its own people, who are savers. We won’t be able to replicate that unless we destroy the bank and insurance industry by mandating they buy our garbage bonds.

        Eventually the game changes from a ‘return on capital’ to a ‘return OF capital’.

  5. Wake me up when ‘Rough Justice for Psycho-Parasites’ Episode 1, begins…
    or news of ‘jumpers’ on Wall St flashes across the miserable little screen.

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