“Jawboning” is the practice of talking about actions you are willing to take, in the hope that the mere suggestion will cause another to change their behavior. The Federal Reserve and politicians are experts at it. I’m talking about it now because it has reached epic proportions.
It’s most evident in the currency markets. Intervening to support or weaken the U.S. dollar is expensive. It’s much easier to just talk it up or down. When politicians want to boost the dollar, they talk about their long-lasting support for a strong dollar policy.
Federal Reserve officials also do it. Back in March, they said they were going to purchase $80 billion of Treasury bonds and $40 billion of mortgage bonds a month. Instead, the Fed’s balance sheet has contracted modestly.
Officials also said the Fed would purchase corporate bonds. Investors leapt at the opportunity because they believed the Fed was backstopping the market. In the end, the Fed bought almost no corporate bonds.
Do you remember that $600 billion set aside for the Main Street Lending Program? The Fed has yet to lend out most of that money. However, the creation of the program helped improve sentiment.
Last year, the Fed supplied a massive $500 billion to the repo (repurchase agreement) market. That was a huge intervention. It successfully convinced money market investors that the Fed would do whatever it takes to ensure liquidity. Even with everything that has gone on over the last few months, the Fed has not had to intervene in the repo market again.
Trading off of promises can work for a while. But eventually, the market will call in all those IOUs. The Fed has promised hundreds of billions in purchases. That has allowed asset prices to surge. The S&P 500 is at new all-time highs. Stay-at-home success stories like Amazon, Apple, and Microsoft have done even better.
At some stage, though, confidence will wobble. It’s then investors will look to the Fed for swift assistance.
Right now, Hurricane Laura is spinning up in the Gulf of Mexico. It’s going to make landfall as a Category 4 or 5 storm. This time last week, it was a tropical depression, so this was a very swift buildup of energy. It could create a great deal of economic damage across southern Texas and Louisiana.
This is the second time in only three years that the Houston area has been hit by exceptional storm surge. It is going to require a great deal of spending to rebuild. That means the Federal Reserve and the federal government will need to leap into action.
A lot of people will be deeply inconvenienced over this coming weekend. Some may lose their lives. This hasn’t been a normal year for disaster-recovery funding due to the COVID-19 pandemic and related stimulus. But the government will still make funds available to blunt the blow of this natural disaster.
Economic purists rebel at the thought of policymakers always finding a reason to print more money. The size of the national debt is already close to historic highs. The trajectory of the debt accumulation is not encouraging. These are legitimate concerns. However, there is just no way we’re ever going to stop bailing out businesses, people, and cities. It’s the humane thing to do.
The only way this kind of activity will end is if we suddenly spend within our means. That will never happen voluntarily. It will have to be forced on us.
That means inflation and higher interest rates are the only things that could possibly change spending behavior. Without them, the addiction to successive infusions of liquidity will continue.
All the best,