- New Science in old markets -

Open letter to the governors of the Federal Reserve about incoherence

Dear governors and FOMC members.

There has been some market confusion lately stemming from your various conflicting individual pronouncements about the likely direction of interest rates. This is bound to be a problem when such close attention is focussed on the comments of individuals in a body that is both collegiate and dispersed but this is a particularly sensitive time and there is great danger here.

Donald Trump, the Republican candidate in the presidential election on November 8th has a currently slightly reduced following, but his abiding appeal rests on his reputation for understanding and mastery of the 'real world' outside Washington politics. His fortune is said to come from adroit business dealings and this 'un-political background' has the potential to attract more support as the many potential weaknesses of his Democratic opponent come under ever greater scrutiny in the ten weeks left.

Mr Trump has recently declared that he sold all his stocks and has advised others to do the same as 'scary scenarios are out there'. I think we can take this to mean that he shares the widely held view that asset prices have been artificially elevated by the ultra-low interest rates that have been part of your policy in the last few years. The corollary to this view is that serious price weakness will occur at some time in the near future.

There would indeed probably be a sharp decline in stocks (and maybe bonds too) if an imminent rise in interest rates were clearly to be signalled by your statements and this could be worsened by the confusion that your conflicting comments are currently causing. A lot of speculative short-term trader positioning before your September meeting could worsen the decline if you do indeed decide to raise rates then or at some unscheduled time soon after. You need not even decide to act - the uncertainty caused by your diametrically differing publicly-aired views might be enough to start a market slide at any moment from now on.

Such a dramatically accurate prophecy would reinforce Mr Trump's claims of insight into the real world of business and markets and could restore his support among those of the electorate who are looking for reasons to vote for him. Unless you start agreeing with one another what is 'the line to take' on Fed policy instead of (as now) debating in public these matters that should be settled in private, you could hand him the election. Is this what you want?


Richard Edwards