The Fed is heading for another catastrophe - page 6

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FED was telling lies so many times, that now nobody believes to their "hints". They will have to do much more than "hint" to take control of a runaway train

 

The Federal Reserve is Not Your Friend

Imagine that the Food and Drug Administration (FDA) was a corporation, with its shares owned by the nation's major pharmaceutical companies. How would you feel about the regulation of medications? Whose interests would this corporation be serving? Or suppose that major oil companies appointed a small committee to periodically announce the price of a barrel of crude in the United States. How would that impact you at the gasoline pump?

Such hypotheticals would strike the majority of Americans as completely absurd, but it's exactly how our banking system operates.

The Federal Reserve is literally owned by the nation's commercial banks, with a rotation of the regional Reserve Bank presidents constituting 5 of the 12 voting members of the Federal Open Market Committee (FOMC), the body that sets targets for certain interest rates. The other 7 members of the FOMC are the D.C.-based Board of Governors—which includes the Fed chairperson, currently Janet Yellen—and are nominated by the President. The Fed serves its owners and patrons—the big banks and the federal government, while the rest of Americans get left behind.

The Federal Reserve has the ability to create legal tender through mere bookkeeping operations. By the simple act of buying, for example, $10 million worth of bonds, the Federal Reserve literally creates $10 million worth of money and adds it into the system. The seller's account goes up by $10 million once the Fed's monies are received. Nobody's account gets debited for $10 million. This is a tremendous amount of power for an institution to possess, and yet the Fed shrouds itself in secrecy and is accountable to no one.

In December 2008, Congress summoned then-Fed Chairman Ben Bernanke to provide information concerning the enormous "emergency liquidity" programs that had begun during the financial crisis earlier that fall—all the new acronyms Wall Street analysts would come to know, such as TAF (Term Auction Facility), PDCF (Primary Dealer Credit Facility), and TSLF (Term Securities Lending Facility). Bernanke did not need Congress' permission to conduct those programs, but even worse, he refused to disclose the recipients of the $1.2 trillion in short-term loans that we now know were being administered behind closed doors. This staggering secret loan payouts doesn't even include hundreds of billions in "swaps" to foreign central banks. Bernanke's rationale was that if the Fed announced the names of the big banks being rescued, then depositors and investors would flee, thus defeating the whole purpose of the rescue operations.

Americans then and now were lectured that the trillions in loans and asset purchases were all for their own good and eventual benefit, to resuscitate the credit markets and bolster home values. Yet the truth remains—it is Wall Street that benefits from the Fed at the expense of Main Street. To make things worse, in October 2008—one month after Lehman Brothers collapsed and precipitated the worst of the financial crisis—the Fed began exercising a new policy of paying interest on reserves. The Fed began to subsidize and directly pay the nation's bankers not to make loans to their customers and keep their reserves parked on deposit with the Fed.

Today, Fed officials can give all sorts of technical explanations for that policy—a move that remains in effect today. Yet your average depositor received no such direct subsidy and likely still receives almost no interest on short term deposits.

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This Wasn't Supposed To Happen: Crashing Inflation Expectations Suggest Imminent Launch Of QE4

The wind up for the most telegraphed rate hike in history was supposed to achieve one thing: generate benign inflation in the form of a rising short end and a broadly steeper yield curve, or in short: boost inflation expectations without crashing the market (recall after 7 years of ZIRP and QE all the media is blasting is that "rate hikes are good for stocks") - after all why else would the Fed be hiking rates if not to offset the market's inflationary expectations and to have "dry policy powder" ahead of the next recession, even if said powder was a meager 25 basis points.

It was most certainly not supposed to achieve this:

This is how Nomura summarizes the chart above:

"with deflation fears in the air and oil getting floored, inflation products have already become an unloved asset class. If the Fed surprises the market with a September hike, we expect all BEIs to fall under pressure but likely led by the <5yr sector as risk markets also crater. Just like currently, BEIs are held hostage to commodities and credit markets even as the Fed probabilities are being revised down."

Here is a better way of summarizing it: the last three times inflation expectations tumbled this low, the Fed was about to launch QE1, QE2, Operation Twist and QE3.

And the Fed is now expected to hike rates in less than a month even as inflation expectations are the lowest since Lehman?

Good luck. The Fed - which is damned if it hikes rates (and crushes financial conditions by tightening, sending deflationary signals surging even higher and undoing 7 years of stock market levitation), and damned if it launches QE4 (as it loses all verbal jawboning credibility it worked so hard to establish in the past year ) - is now truly boxed in.

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Bernanke told clearly : there will be no rate hike as long as he is alive

 

There's something about the Fed's urgency to hike that's offputting

What's the rush?

The US employment numbers tell the Fed it 'can' hike rates but inflation data, the strong dollar and the sluggishness in global economies say they don't have to. If anything, they argue that the Fed should be more patient.

The column that did the round today was from one-time Fed Chairman candidate Larry Summers who argued that the Fed could be making a "serious error."

Paul Krugman picks up the thread as well and blames a Fed that wants to get back to 'normal' without recognizing that the old models are invalid and that inflation isn't an issue.

"A lot has to do with the urge to resume a conventional central-banker role," Krugman writes. "The whole culture of central banks involves saying no to stuff people want, taking away the punch bowl as the party gets going, having the courage to do unpopular things; everyone wants to be Paul Volcker. The Fed is really, really eager to return to that position - and is, I fear, engaging in wishful thinking, believing much too readily that a return to normalcy is appropriate."

If the Fed doesn't show that it gets the message soon, the market will continue to kick and scream.

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"If the Fed doesn't show that it gets the message soon, the market will continue to kick and scream."

The FED is not going to do anything any time soon - we should get ready for "kick and scream" part

 

FED printing machines working at 110%

ECB printing machines working at 110%

BOE printing machines working at 110%

SNB printing machines working at 110%

POBC printing machines working at 110%

What a nice world

 

A Fed Rate Hike In September? No…Yes…Maybe?

Treasury yields held on to their modest rebound this week through Thursday’s close, ahead of the Federal Reserve annual conference that begins today in Jackson Hole, Wyoming. No doubt the discussions will center on whether the central bank will begin raising interest rates at its Sept. 16-17 policy meeting. Earlier this week, New York Fed chief Bill Dudley threw cold water on the prospects for tightening next month, explaining that the case for a rate hike looked “less compelling” relative to two weeks earlier. The catalyst for his cautious view, of course, is the recent market turbulence. But in the wake of this week’s US economic reports, it’s not obvious that the macro trend is stumbling for the world’s largest economy, even if Mr. Market’s hysterics of late suggest otherwise.

“The United States relies more than any other developed economy on demand within our own borders,” the chief economist at Northern Trust (NASDAQ:NTRS) tells The New York Times. “While the focus in the past three weeks has been on international instability, this should position us to withstand the consequences of recent market volatility,” explains Carl Tannenbaum.

The Treasury market appears to agree–reluctantly, cautiously and ever so gently this week. After the benchmark 10-year yield briefly dipped below 2% on Monday on an intraday basis—the lowest level since late-April—the rate has bounced back, settling at 2.18% yesterday (Aug. 27), according to Treasury.gov data. That’s just below the level that prevailed before the latest selling wave began a week ago. In short, the key Treasury yield has effectively dismissed this week’s market turbulence as noise.

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Bernanke : "not while I am alive"

 

What's the take on the Federal Reserve September rate hike after Jackson Hole?

Ryan posted up the summary of the pertinent comments fro Jackson Hold over the weekend.

So, what to make of it all?

Bloomberg have a recap, and they've concluded:
... looking through low inflation ... brushing aside financial market turmoil, U.S. policy makers at the Kansas City Federal Reserve's annual retreat in Jackson Hole, Wyoming, had a largely consistent message: We're staying the course.
They cite Federal Reserve Vice Chairman Stanley Fischer, and he expects inflation to rise towards the 2% target:
"There is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further"

But, of course ... we didn't get a straight answer on when the hike is coming. Bolding is mine:

Fischer was careful to announce that he wasn't signaling an impending rate increase, the remarks suggested a move wasn't ruled out(on)...September 16-17

And, this assessment from Jonathan Wright (a professor at Johns Hopkins University & former Fed economist who attended Jackson Hole this year):
"It sounds to me as though in his heart of hearts, he would like to tighten in September. But others on the committee are more hesitant, like Bill Dudley,"

In his "heart of hearts"? Doesn't sound like cold, rational economist speak. I guess emotion plays a role even in decisions at this level.

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