Last Man Standing on Interest Rates

Last man standing—is he the winner?

Or the loser?

I’m sitting here on a sunny afternoon near the beach in Cascais, Portugal. I’m reading a story about the Canadian Central Bank cutting interest rates last week—to general surprise. The bank finally blinked in the face of a slowing economy.

A day later, the European Central Bank cut rates.

Those never-crazy Swiss surprised everyone and cut rates way back in March.

Brazil cut.

So did Argentina and Singapore.

The US?

The Fed can’t get off the pot because it can’t finish its self-imposed business of taming inflation back into the 2% range—a range predicated on nothing more economically scientific than an off-the-cuff comment from a Bank of New Zealand official who wanted to get home for Christmas.

Big G7 countries have started the rate-cutting process because they realize the underlying weakness in their economies and they’re trying to get ahead of the slowdown.

The Fed, on the other hand, can’t see past inflation, and can’t see the stagflation they’re brewing with their head-in-the-sand approach.

The Fed is so focused on a made-up number that board members fail to see the cracks in the economic façade.

Pray tell, El Jefe, what cracks doth thou speak of?

I’ve been beating this horse for a long while now, so I’ll let Mohamed El-Erian take the truncheon and have a go. He’s president of Queens’ College at Cambridge University in the UK now, but was once the grand pooh-bah of economics and investment strategy at investment giant PIMCO. He says:

So far, we’ve had disappointing retail sales. We’ve had disappointing [Purchasing Managers Index] manufacturing numbers. The [Institute for Supply Management] numbers were disappointing. [Recent] job vacancies were considerably below expectations. [Citigroup] has this ‘index of surprises,’ and we’ve had nothing but negative surprises. And all that is saying to us is that the economy is slowing much faster than most people expected, including the Fed.

That last bit of emphasis is from me.

I read the economic press. I usually shake my head.

I really don’t think that lots of econ writers think at all, at least not beyond the press release they receive and the cheerleaders they talk to who insist the US economy is “all that and a bag of chips,” to rekindle a 1990s phrase that I probably shouldn’t rekindle.

These days, I’m down the rabbit hole of videography (you might have guessed from my recent video dispatches), and in videography terms, the popular press and way too many economists look at America and her economy through a lens that produces a lovely bokeh effect that’s so pleasing to the eye. (That’s where part of the image is blurred to make other parts stand out.)

I tend to shoot my video “raw” so I have something real to work with in post-production. I see the warts. The flaws. The ugly skies. All the real information necessary before turning out the finished work.

And in the real world, America’s economy isn’t bokeh one bit.

As El-Erian noted, we’ve had nothing but negative surprises in an economy slowing much faster than most people expected, including the Fed.

You and I, however, are not most people.

We’ve been expecting this.

I’ve been writing about this for many, many months—documenting the ways in which the economy is struggling under the surface. The myriad ways in which American consumers—those who aren’t affluent—are struggling on the surface.

And yet the Fed is so intent on reaching a nonsensical 2% inflation target that it’s discounting all the signs that other central banks are clearly picking up on.

I mean, some Fed governors insist that interest rates need to go higher from here, not retreat.

I honestly wonder at times how one goes about landing a gig on the Federal Open Market Committee. Like, what kind of mail-order PhD do you need to qualify? And on which Cracker Jack box can I find the order form?

You cannot look at this economy and say, “Yep—this plough horse can carry more weight, no problem!”

Daggum horse is about to keel over as is.

So, the Fed is very likely to be last man standing.

And that’s probably going to be a bad thing all round.

Or—and this is just a wild guess—the Fed surprises the world just as the Canucks and the Swissies did and cuts rates to everyone’s great astonishment.

The next Fed interest rate announcement is today.

More to come…