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Could It Turn Out to Be the Fed's 'Operation Twist of Fate'?


Oddly, given the convergence of many significant factors, it's quite possible -- completely contrary to prevailing viewpoints -- that the Fed's actions may have been too restrictive.


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Two Levels of Conclusions

There are two levels of conclusions to be drawn, as we see it. The first is that money growth is not advancing as wildly as many commentators have pronounced or assumed. This has a host of implications. Probably the most important of these is even less prospect for Fed tightening than has been previously imagined, even though overtly and repeatedly stated by Dr. Bernanke.

The second level is a little more speculative and has to do with the rapidly approaching "fiscal cliff." Some are estimating as much as a 3.9 percentage-point reduction in the growth rate of GDP next year-enough to make the year's total growth rate negative, plunging the country back into recession-should legislators fail to agree on something that will otherwise result in a combination of both large tax increases and government spending cuts.

Not as much discussed is the successive phase of that event, yet another looming debt-ceiling negotiation, as our debt even now soars past $16.25 trillion. All of this is further complicated by simultaneous effectuation of new Obamacare mandates and costs. The combination of these rapid-fire developments in "perfect storm"-like conjunction cannot be viewed as positive regarding the already gloomy 8% or thereabouts unemployment rate, which in itself is understating true unemployment by two to three percentage points or more given reductions in the portion of that calculation related to workers who have given up looking for work (although that quantity may be stabilizing to some extent lately).

Oddly, given the convergence of all of these significant factors, it is quite possible-completely contrary to prevailing viewpoints-the Fed's actions may have been too restrictive. And that still leaves the unknown and highly unpredictable effects of further credit-rating-agency downgrades amidst this entire process, which in the past seem to have been fleeting in their market effects.

We believe there is the possibility we may even have a "soft landing," but that doesn't mean the crosswinds approaching the runway won't be without some turbulence. If during this time frame the congress manages to come together on a plan for spending and tax reform-even if that includes a protracted government shutdown-we could resume the trajectory of slow economic growth we've been on for some time, with probable implications of flattening unemployment-rate trends at about the levels we're experiencing now.
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