The Market Ticker
Commentary on The Capital Markets- Category [Federal Reserve]

In a word, meh:

For immediate release

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective. Longer-term inflation expectations have remained stable.

Uh huh.  In the meantime we're closing down (slowly) the debasement absorption that comes from deficit spending.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

In other words the destruction of fixed-asset portfolios has to stop (exactly as I put forward originally.)

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

QE is finished.  (It won't return either.)

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Uh huh.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance. President Plosser objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.

Big surprise.....

Oh, as the equities?  

They've been floating on the hot air, and that air is getting a bit on the rare side......

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Heh look, an admission!

During the first and second quarters of 2014, the velocity of the monetary base was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession. This implies that the unprecedented monetary base increase driven by the Fed's large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP.

In other words, QE did not advance economic activity.

What's worse?  Right here:

Fed policy, in which it has expanded its balance sheet to nearly $4.5 trillion by buying various debt instruments, including Treasurys, has driven interest rates lower. Under normal circumstances, the decline in 10-year Treasury rates would have pushed monetary velocity lower by 0.085 percentage points. Instead, it has declined 5.85 percentage points, fully 69 times more than models would suggest, the paper states.

In other words, our models are broken; they not only missed expectations they have absolutely no relationship to what actually happened.

This of course means that all of the other expected outcomes are also likely wrong -- as are those who claim that the Fed can "exit" without catastrophic consequences.

See, the problem at its core is that we never unwound all the bad debts that distorted prices in the first place.

That is, the goal of "monetary policy" was not to advance the economy, but to protect those who had made bad investments from having to eat the consequences of having done so, while at the same time maintaining and furthering the destruction in purchasing power that those bad investments caused when the credit necessary to make them was invented out of thin air.

Good luck unwinding that, fools.

Oh, and before you go point a finger at The Fed or start your Ron Paul horsecrap, full-stop.

The root of this policy is not there; it lies in the Federal Government, not the Federal Reserve.  It is the act of deficit spending that caused the problem in the first place by destroying consumer purchasing power -- this then led to the search for replacement of that purchasing power that was temporarily accommodated through debt accumulation, and that occurred (the issuance of unbacked credit) only because intentional violations of black-letter statute were permitted by The Federal Reserve -- an act that Congress has the authority and in fact responsibility to police and prevent since The Fed only exists due to a law passed by that same Congress.

And who was in that Congress the entire time?  

Thought so -- whether your particular favored "critter" has the last name "Paul" or not.

PS: If they don't unwind this crap the consequences are worse than if they do.  Damned if you do, double-damned if you don't.

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Not just Bernanke, either -- all of the FOMC and the entire NY Fed.

Mr. Bernanke is quoted making the statement in a document filed on Aug. 22 with theU.S. Court of Federal Claims as part of a lawsuit linked to the 2008 government bailout of insurance giant American International Group Inc.AIG +0.37%

“September and October of 2008 was the worst financial crisis in global history, including the Great Depression,” Mr. Bernanke is quoted as saying in the document filed with the court. Of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”

From where I sit I allege that's either perjury or an admission of intentional and willful misconduct.

After all The Fed's mandate is to regulate money and credit supply.  That includes the credit that AIG was (ab)using with their little game.

Oh sure, AIG itself may have been outside of the Fed's regulatory umbrella, but the 12 financial institutions were not.

Any time the blue line is above the red the money and credit system, which The Fed is responsible for balancing under the law, is in fact not in balance.  It wasn't leading up to the crash in 2008 and it isn't now.

Therefore either Bernanke and pals were incompetent or complicit.  And since Bernanke claims competence, as does Geithner, that leaves only one option.

For how long will Americans allow this blatant, in-your-face outrageous crap to continue?

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Or is it something else entirely -- whether The Fed tapered or not it wouldn't matter, as they best they can do is pump the stock market?

Paul Schatz, president of Heritage Capital thinks so. He argues that it's important the economy fully recovers before there is a tightening, “The mistake that feds or governments make after the first recession, the minute the light in the tunnel is clear, they start raising rates. My argument is that GDP growth back to 4% or higher is not going to be seen until we get through one more mild recession.”

You're not going to get sustained GDP expansion of 4% or better at all because the debt overhang prohibits it.

That's the problem -- and yet the Fed's QE, along with deficit spending, expand that debt overhang.

While the individual year damage is (relatively) small, the cumulative impact is not.  It is also a bitch to reverse or resolve, because you have to unwind the entire mess -- and all the excess debt.

Evidence for this?


A quarter of American families are "just getting by" and 13% more are "finding it difficult to get by."  That's nearly 4 in 10.  A huge percentage, somewhere around half, couldn't raise a mere $400 without selling something or going into hock.  Only 30% are better off today than five years ago.

Education costs continue to ramp, and making debt more accessible and cheaper makes this cost go the wrong way.  The same thing is true for cars; the average auto loan term is now 66 months and a quarter are for terms over six years.  The average financed amount is at an all time high of nearly $28,000.

Even worse the average new car payment is now nearly $500 a month, or $6,000 a year.  How do you do that on an average working person's salary?

None of this is helped by "ultra low interest rates" or bond-buying.  In fact, it forces pricing and loans in the wrong direction.

So on the one hand we have a policy that has failed to raise GDP (because it can't), there is international (Japan anyone?) evidence that it doesn't work in this regard, and it causes harm in that it expands debt accreation by consumers across the economy.  That, by the way, is why the long-term negative impact on GDP comes; that which you buy today you not only don't need tomorrow in addition you must pay the interest, so it impacts your spending twice!

Yet you still have people insisting that we double down on a blown policy.

These people need to be shouted off the stage.

All of them.

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