In yesterday's column, I noted that the principal commonality of message delivered by the speakers at the Jackson Hole Symposium was that monetary policies enacted since the Lehman crisis era have now largely achieved their objectives and that it is time for fiscal policy to take the principal public financial policy role in stimulating economic activity.
There is nothing new in this message other than the fact that it was delivered in one place at one time by academics and global central bankers, which carries the force of "can you hear me now?"
This also implies that the Fed's intention is to steadily revert from the temporary proactive position it's maintained with respect to the application of monetary policy since the Lehman crisis back to its traditional role of being reactive.
The focus of the Fed's monetary policies since the Lehman crisis era has been to pursue financial stability by way of supporting the financial markets on the assumption that the wealth effect caused by these actions would stimulate consumption by those most benefitted by it, the wealthy, and that would become the catalyst for a resumption of real economic growth, allowing the Fed to begin the process of normalization, typically referred to as trickle-down economics.
The first part of that has been successful. The Fed has created financial market stability and been the catalyst for an increase on asset values that has benefitted asset owners.
The second part, trickle down, has not occurred, and the Fed is now stating that the responsibility for encouraging that activity, or directly doing so, is the purview of fiscal authorities.
Encouraging this comes in the form of reduced tax and regulatory burdens on the private sector and directly doing so comes in the form of increased government outlays.
How exactly the next executive administration in Washington is going to pursue that, and what is possible, will be determined not just by the pragmatic necessity for doing so, but what the results of the next election are (who wins the presidency and which parties control the Senate and House).
But right now there is a far more important issue for traders, speculators and investors. There is a one-year gap from now until the next administration's first fiscal budget is enacted.
During these next 12 months, the Fed is already signaling that it is in the process of reverting to not only being reactive, but in following its traditional models of economic activity.
Those models are indicating that the Fed needs to raise rates soon. I still think doing so is unlikely, but the FOMC members are increasingly vocal about the need to do so. Part of the process of rate normalization is having standard operating procedures, rules, the FOMC abides by that are supposed to increase transparency of monetary policy decisions.
Although the speakers in Jackson Hole all indicated that the Fed stands ready to supply monetary support in the event of another crisis, they are not going to attempt to preempt a crisis from occurring by responding quickly to financial market volatility.
But more importantly, the Fed is indicating that it soon intends to follow its models of economic activity, which require rate increases, regardless of the fact that its aggregate inflation target has not been met and may not be met for several years.
In other words, the safety net of monetary policies targeted at financial market stability have already been removed and will not be enacted again if economic activity dictates otherwise, regardless of how the capital markets, especially equities, respond to the Fed's reversion to normal procedures of being reactive to economic data.
The germane point is that between at least now and next September there's neither a monetary or fiscal safety net for market participants to rely.
It's too late for the Obama administration to successfully enact a fiscal stimulus package because many of the elected officials in Congress are running for re-election and the electorate's response to that is unknown. So, they'll not affirm the outgoing administrations attempt to do so.
It's also too early for the next administration to attempt to create a fiscal stop-gap between the inauguration next Jan. 20 and the implementation of a fiscal budget for 2018. There are too many unknowns concerning the leadership of the next executive and legislative branches to make that a political possibility.
Lastly, retail market participants and the financial media are not exhibiting a collective awareness of the logistics of this situation, which implies that they won't do so until and unless there is a negative market shock of some kind. That also implies that if that occurs the awakening by retail investors could cause a correction to be more severe.