Destination Reformation — The Dawn of a New Era in Central Banking

It may be cold outside but the heat is on. Without exception, every one of the 45 OECD country’s economies is in expansion mode. In the event you’re wondering which country is near the top of the economic performance heap, that would be the good old United States of America. In fact, the ongoing and biblical rebuild of natural-disaster, exacerbated by depleted inventories on tap, could push fourth quarter growth into the 4% range.

According to one brave forecaster on Bloomberg, we could see 4.5% GDP growth in this year’s final three months before all is said and done. As an aside, you can drive a Mack truck through the range of estimates of 1.6% to 4.5%. If the most optimistic of the bunch is correct, 2017 will grow by 3%, a full-on gallop compared to the 1.9% snail’s pace of the past decade.

To say these out of the norm growth rates will give policymakers at the Federal Reserve, especially the old guard, pause is an understatement. It will make their Keynesian-coiffed hair stand up on end. The pickup implies a continued decline in the unemployment rate and even wage inflation as demand outstrips supply for construction and utility workers, petroleum and structural engineers and especially truck drivers, among other trades and professions.

The real question is will the Fed overtighten the economy into recession just as growth is cascading down from its sugar high? Tradition dictates that this will indeed be the case. A dive into the weeds of the University of Michigan’s latest confidence figures also reveals that Americans at all income levels are more than aware of the stock market’s roaring rally (hat tip to Dr. Gates).

Need I continue to connect the dots between the message in the yield curve being the flattest in a decade and expectations on helium highs?

I can only hope the pragmatist in Jay Powell, the veteran of the financial markets recognizes the opposed communiques emanating from the economic data and the bond market. Euphoria trumps still waters when it comes to hiding what lies beneath. Home sales are stuttering, car and credit card defaults are mounting. And insane asset market valuations render the true tenuous nature of the economy all that more vulnerable.

It will take the strongest leader in generations at the Fed’s helm to steer the economy through what’s to come. It will take an all-out reformation to return integrity to the institution. With the magnitude of that order in mind, I looked this week to Martin Luther, whose bravery 500 years ago changed the world for the better.

Before handing off this week’s seminal piece, I would like to add that while the enormity of Martin Luther’s life accomplishments is undeniable, his later in life anti-Semitic writings can be seen as nothing other than deplorable.

One last thing. Today’s newsletter is the sixth installment in a seminal series that began five days after I left the Fed beginning with The Great Abdication and continuing on to Has the Fed Bankrupted the Nation?, Central Banks and the Rise of Extremism, The Overlords of Finance and most recently, The Greater Moderation. 

With that I humbly offer you, Destination Reformation: The Dawn of a New Era in Central Banking.

From chilly Little Rock, wishing you well,

 Danielle

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