Imagine you live in a terrific neighborhood backed right up to a large wilderness. This heavily forested area has inside of it grown up a tremendous amount of underbrush. The local government, concerned for your property as well as those of your neighbors, starts making noises about taking care of the land before it dries out and a wildfire starts and gets out of control.

Intending on undertaking a controlled burn at some point, residents become more and more nervous. Their unease is not about the brush behind their houses, they think it’s nowhere near much of a problem, more so about how the local government has tended to mishandle fires in the past.

What keeps them from doing so is continuation of clouds and the occasional rain. So long as it is cloudy, they have been content if agitated to let things stay as they are. The government’s forecasters, however, see the faint glimmer of sun way off in the distance and are convinced much drier and hotter conditions are surely coming. They constantly recommend immediate and even forceful mitigation before it is too late. Waiting for all the clouds to part, they say, risks allowing the worst conditions to develop.

The local insurance salesman is about the only happy person in the area, doing a robust business the more it looks like the government will take action. People are buying home owner’s insurance and adding to existing policies not because they agree with government forecasters about sunny days ahead; rather, they buy it out of fear that a few cloudless days in a row might be enough to convince the government to carry out its woolgathering plans.

This is what passes for hawkishness in 2018. This crude analogy is the bond market (neighbors) selling off (insurance) over the Fed (local government) acting on dubious information without obvious negatives (clouds) that have kept them reluctantly on hold. The central banker is predisposed to the positive because that’s in the modern age his whole evaluation. Bernanke was lucky in that someone came up with “jobs saved” so as to allow a much-reduced standard for success.

Monetary evolution forced monetary policy over the horizon. Working by economic aggregates rather than any definition money, let alone a good one, means that policymakers have to act before risks move against them. It places a great deal of emphasis on forecasting, an intuition and skill which the Federal Reserve has shown it does not possess.

New FOMC Chairman Jerome (Jay) Powell tells Congress today he is optimistic. The bond market sells off immediately – not because they believe in Powell’s forecasts, but because it has to take into account how much Powell does.

More importantly, however, the reason bonds don’t sell off more is that it trades on the knowledge of the FOMC’s atrocious track record. The Fed is going to raise rates because it believes it has to – until the next “something” happens which shows everyone they didn’t know what they were talking about. This pattern has repeated too many times before for it to be random.

Just four years ago, to be precise, Janet Yellen came into the same office under much the same illusions. Things were obviously different in that QE was still then ongoing, but overall the economy looked like it was moving in the right direction ,even quickly, as it swung to an upturn between the 2012 downturn and what would be just a few months later the “rising dollar.”

Inflation was also at that time on everyone’s agenda, for as well as against. Monetary deflation (or “rising dollar”) was not.

Many Republicans also believe the Fed is risking a spike in inflation with its easy money policies and argue the central bank is far too secretive in its operations. Republicans on the committee this year launched a centennial “review” of the Fed, vowing to scrutinize the central bank’s policies and operations. Chairman Jeb Hensarling (R-Texas) plans to introduce legislation making changes to the institution later this year.


Rep. Shelley Moore Capito (R-W.Va.), a senior member of the committee, said in an interview that it’s “a good time to take a look and see if they’ve gone far afield from their original mission and if the committee feels that’s the case, now’s a good time to rein it in. A lot of people think they’re just printing money.”

Congressman Jeb Hensarling started off Yellen’s first hearings on the Hill by questioning why the Fed wasn’t following its own guidance. The prior Fed Chairman Ben Bernanke had said that 6.5% unemployment would be a standard of significance; at that level, the economy, he surmised, would be in good enough shape so as to warrant revisiting monetary policy.

The rate had been 8% and stuck around that range for the 2012 downturn. By the time Yellen was sworn in on as Chairman, it was 6.6% and right on the edge of what was taken by many as something more than a rule of thumb. Hensarling asked her why the central bank would set a rule and “then bend it. Are you a sensible central banker and if not, will you become one?”

The answer to that question was an easy “no”, not that Yellen would have agreed then or now. In pointing to the unemployment rate, the Congressman was getting to a crucial truth if coming at it from the exact wrong direction. He was of the inflation camp and wondering why the Fed wasn’t acting more forcefully for the inflation risks (money printing) that might explode in 2015 if not later 2014.

Instead, he should have seen the unemployment rate as a flawed metric, overstating the health of the economy where the reasons, and risks, spoke to monetary-driven downsides. Even if he wasn’t that advanced in his views at that time early on in 2014 (ahem, CNY), a year later it should have then been apparent that all the optimism expressed at Yellen’s first hearing on all sides was way, way overdone – both in attempted critique of the Fed as well as all the rest given on her, and Bernanke’s, behalf.

The whole thing was a farce. Mystified by that one number, nobody bothered to ask Yellen about the real condition which was, to be sure, not really any different than it had been since 2009.

So, here we are once again on an upturn that isn’t any different than the last three. But the unemployment rate is now 4.1%, and though even the FOMC has to admit there is no wage pressure whatsoever despite their insistence for years that there will be when the preferred optimistic scenario finally materializes, the farce will go forward because right at this moment it’s more difficult to see why they have it all wrong once again.

Powell isn’t actually hawkish, he’s just less encumbered in the same way Yellen was when she started. They all want to take a flamethrower to the backyard wilderness because to them it will mean they have done their job, whether it was ever warranted or not.