The takeaway from this weekend’s The Kansas City Federal Reserve Bank’s annual meeting in Jackson Hole, Wyoming is … more of the same.
Janet Yellen & Co. said they may raise in September (they won’t or can’t that close to an election) and they could raise in December (they may like last year as a token gesture, but are fearful it will cripple the economy like the Dec. hike did this year).
We are nine years into the Great Malaise, coming out of the Great Recession. This is what capitalism looks like when you do not allow failed institutions to go bankrupt.
As Wall Street limps along while carrying a broken balance sheet using the Federal Reserve’s largess as a crutch, you have an economy that cannot reach escape velocity to grow.
The misallocation of resources — companies borrowing money to buyback stock instead of growing their business — is a product of the banks pulling back from riskier loans due to impaired balance sheets.
In a nutshell this in turn leads to manufacturing companies paying decent salaries — stifled by the lack of needed capital — closing and pushing its ex-employees into jobs at Wal-Mart and McDonalds for less pay and benefits.
So when Yellen said on Friday, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.”
This is jawboning to tell markets pull back a bit from that equity asset bubble that Yellen created, but not too much because as you know that’s the only place you will see your capital treated fairly well.
The takeaway is the Fed can’t dig itself out of the hole it created along with Treasury of propping up zombie banks. You can’t grow this economy without capital — and its associated risk — being deployed to spur that growth.