Rabobank: Why Can’t Central Banks Raise Rates While Still Doing QE Or MMT

Rabobank: Why Can’t Central Banks Raise Rates While Still Doing QE Or MMT

By Michael Every of Rabobank

Hawks, Doves, ‘Haves’, ‘Dowks’, and Dodos

Yesterday the RBA threw in the towel on its policy of Yield Curve Control (YCC); suggested a late-2023 rate hike not a late-2024 one; and then went out of its way to show that it is dovish enough to stick to this particular line in the sand, honest. As such, do words like ‘hawk’ and ‘dove’ to describe central banks still have meaning? For example, the RBA walked away from a policy tool that cost it nothing, leaving it massively in the red on a mark-to-market on the bonds it had bought, when YCC could have allowed it to break even; but it did so while making clear it *still* won’t raise rates, despite everything looking better according to Mr. Market; and that every single factor under the sun is responsible for Aussie house prices exploding higher apart from the cost of mortgages that it controls. Today is all about the Fed’s turn to do the same hawk-yet-dove trick, aimed at stocks, as it announces QE tapering. As such, we really need to evolve new market vocab to describe central-bank actions.

How about a portmanteau of hawk and dove such as ‘have’? Too confusing, if accurate in terms of the ‘haves’ and ‘have nots’, which central banks don’t want to resolve, just talk about endlessly (because talk, like fiat money, is cheap). So, how about ‘dowk’? It sounds appropriately like ‘dork’, so gets my vote, and more so every time I hear Soviet-apparatchik waffle explaining why up is down and we should all be grateful for it. However, the sheer pointlessness of what the RBA did, and is promising to do, i.e., nothing, as all around us is in such flux, argues the appropriate avian term for central banks should be ‘dodo’. As in unable to compete outside of a sheltered ecosystem that no longer exists; as in ‘dead as a dodo’. After all, we need to look around us.

In markets: the Dow is above 36,000; global bond yields are sliding again; the US dollar is rallying, except against the de facto pegged CNY; Chinese junk bond yields are sky-rocketing; global metals prices are collapsing, led by a ‘whocouldanooed?’ slump in China’s $62 trillion residential property sector; energy is dipping, but market calls have just been made for oil to go to $120 by next summer, and Russian gas and coal are not flowing west; and fertilizer prices are exploding higher, up nearly 400% in Europe vs. mid-2020 levels, pointing to further food inflation ahead.
The economy: is still a riddle, wrapped in a mystery, inside an enigma; labor markets are a muddle, though the ultimate solution is either higher pay for Joe and Jane Six-pack, or no final demand; US flights are being cancelled due to staffing levels and vaccine mandates; Chinese households are stocking up on essentials in case of lockdowns; Premier Li Keqiang warns the economy faces downward pressures and requires “cross-cyclical adjustments”; inventory levels are building within the already-slowing US economy despite the absence of key stock at retailers; US fiscal stimulus response is still logjammed; and US ports are too, with escalating fines for stuck cargo kicking in from mid-month, and share-cropping truckers supposed to take the load.
In politics: the US is blocking a publisher mega-merger on anti-trust grounds, which marks a sea-change in approach; the White House wants Saule Omarova, a noted critic of Wall Street, to oversee large banks, so likewise (and does this mean Powell stays or not?); it seems the Democrats support SALT tax cuts for the millionaires of New York and California as part of a fiscally responsible Build Back Better bill; and the bellwether governor’s race in Virginia points to a shock victory for the Republican in a state President Biden won by 10 points under a year ago – should we get ready for Make America Great Again again?
In geopolitics: Ukraine denies a Washington Post report about a Russian troop build-up on its border; WeChat has videos of the PLA moving lots of military equipment around Hangzhou and Zhejiang; and the Financial Times pulpit angst-ily shows ‘How we can share our divided world’,… without showing anything of the kind, other than that “no reasonable alternative exists.” Very Norman Angell/‘The Great Illusion’ – except past his denial and anger, and deep into bargaining. Depression and acceptance, my daily lot in life, are up next.

So, against all this, the correct response vis-à-vis QE and rates today is….?

Exactly! Flap your little wings, dodo, and see where it gets you.

If central banks could, in a Lamarckian/cheap-Hollywood-CGI sense, spontaneously evolve into something more fitting for the present environment, what would it look like?

Obviously, there is the ‘we are an arm of the government’ MMT role they played for centuries, and for decades after WW2 as well, before devolving into their present technobabble Cantillon-ATMs-for-the-Davos-set iteration. It will help when the next global downturn hits on the back of the ongoing supply-side shock and the lack of real wage growth. Even if real wages do start rising, why couldn’t central banks fund key infrastructure to resolve supply-side constraints to lower inflation pressures again, rather than just killing off the off-setting wage demands? (For the RBNZ, an endangered flightless bird already hiking rates, note that despite unemployment dropping to 3.4%, lower than the 3.9% expected, average hourly earnings were up just 1.2% q/q in Q3 vs. 1.5% consensus, and in the private sector just 0.7% vs. 0.8%, and 0.9% in Q2.)

Indeed, do central banks really have to do MMT *or* QE only when rates are near zero? Why? Why can’t they raise rates, to sort the wheat from the chaff, tilt the economy back towards rewarding savers and productive investment over asset prices and financialization, and still push in liquidity via asset purchases as and when needed, either via QE (help the rich) or MMT (help the poor)? Cue Cantillon-ATMs-for-the-Davos-set technobabble to tell me why this cannot be done (basically “because markets,” which actually means ‘because politics”).

Anyway, I’ve whittled away a little of the time remaining before the Fed acts, and the next stage of this global meta-crisis unfolds. If it follows the Lowe’s lead, Powell likely won’t ruffle too many feathers today. But ultimately, this bird cannot fly – and new predators abound

Tyler Durden
Wed, 11/03/2021 – 09:50

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