the current Narrative associated with Federal Reserve policy is just as powerful and just as real as any historical Narrative I am aware of, including the Narratives of global religions and major nationalities. Fifty years from now, will we look back on Central Bank Omnipotence as a dead myth, as something akin to Manifest Destiny, or will it continue to shape our expectations and behaviors as the Founding Fathers
…What you want to know is what everyone thinks that everyone thinks about the Fed statement, and you can’t find that in the Fed statement, nor in any private information or belief. You can only find it in the Narrative that emerges after the Fed statement is released. So you wait for the talking heads and famous economists and famous investors to tell you how to interpret the Fed statement, but not because you can’t do the interpreting yourself and not because you think the talking heads are smarter than you are. You wait because you know that everyone else is also waiting. You are playing a game, in the formal sense of the word. You wait because it is the act of making public statements that creates Common Knowledge, and until those public statements are made you don’t know what move to make in the game.
I visited the web site because a John Mauldin email newsletter reprinted a different Ben Hunt essay. From yet another Ben Hunt essay:
the Narrative of Central Banker Omnipotence. Like all effective Narratives it’s simple: central bank policy WILL determine market outcomes. There is no political or fundamental economic issue impacting markets that cannot be addressed by central banks. Not only are central banks the ultimate back-stop for market stability (although that is an entirely separate Narrative), but also they are the immediate arbiters of market outcomes. Whether the market goes up or down depends on whether central bank policy is positive or negative for markets. The Narrative of Central Banker Omnipotence does NOT imply that the market will always go up or that central bank policy will always support the market. It connotes that whatever the central bank policy might be, it will drive a market outcome; whatever the market outcome, it was driven by a central bank policy.
…debate over the merits of open-ended QE only intensify the Common Knowledge that Fed policy was responsible for market outcomes in 2012.
In some sense, it does not matter whether you are in favor of QE or against it. If you are passionate about it, you reinforce the Narrative of Central Banker Omnipotence. Regular readers will know that I instead hold a view of central banker near-impotence. That makes me quite out of tune with the conventional narrative.
One can make the case that expectations are everything and if everyone believes the bank to be effective, expectations will make it so, if most believe they are doing the right thing, it will be the right thing, and if most do not, it will not. One can base recessions entirely on this; when a majority no longer believe they are doing the right thing, the economy turns to recession, and when a sufficient number believe they are doing no more harm and may be doing some good, the economy will turn up. The degree of belief results in the measure of growth or decline. Loss of belief in their effectiveness results in meandering or stagnation. Just the psychological theory of recessions.
The central bank narrative, like money itself, is a coordination signal. Its power is in the outcomes of this human coordination. The same goes for religion, nation states, etc. If the net outcomes turn out to be undesirable (eg giant misallocation of resources) the power will disappear.