Why The Fed Is An SDI (Systematically Dangerous Institution)

It bears saying still again. The Fed is an SDI. In the argot that central bankers prattle on about these days, that stands for Systematically Dangerous Institution.

Indeed, when it comes to the rinse and repeat disease, or what Einstein termed the definitional insanity of doing the same thing over and over and expecting a different result, the current Fed whisperer at the Wall Street Journal, Nick Timiraos, this AM provided still another example. He informs us that the last 25 basis point rate increase was a down-to-the-wire close call.

Federal Reserve Chair Jerome Powell and his colleagues faced their closest call on interest rates in years. It wasn’t until the clock was ticking down two days before their scheduled decision last month that senior leaders settled on a plan to lift them by a quarter percentage point.

In truth, there was no close call about it. For crying out loud the inflation-adjusted Fed funds rate is still -1.9%, meaning that the FOMC is so far behind the inflation curve that they can barely see its tail lights.

And we are not talking here about a few months of excessive rate repression that needs correction. To the contrary, during the past 180 months—since the eve of the GFC in March 2008—the Fed funds rate has been negative in real terms 96% of the time.

Even during the scant seven months of early 2019 when real rates peeked above the zero bound, it was barely by a smidgen, breaking into positive territory by an average of just +13 basis points.

So the newsworthy point about the last rate increase is not that they actually did it, but that it was only 25 basis points. The chart below is nothing less than an inflationary time bomb, yet the monetary mountebanks at the Eccles Building equivocated about continue to snuff out the fuse.