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Commentary on The Capital Markets- Category [Federal Reserve]

So Yellen says the US Economy is on "solid" footing.

Well, then why are policy rates at emergency levels?

That's simple: Rates have not been determined by economic factors for the last several years, since at least 2010-2011.

The problem is that Yellen knows that asset prices (most-particularly stocks, bonds and houses) are all at ridiculously high levels as a consequence of all the leverage in the system that has been taken with borrowed money.

What she doesn't know is how much the bond, stock and housing markets will contract when rates go up; the difference in a borrowed rate of 5% -> 5.25% is small, but the leverage difference of a rate going from 0.1% -> 0.25% is enormous.

The consumer will see almost nothing from such a change.  Likewise, the home-buyer will see almost nothing in terms of impact.  But the home builderwho was borrowing funds at 0.5% to buy back stock, will see their carrying costs go up 50% which they may not have.

This is the trap that Yellen finds herself in; she knows there are plenty of over-levered institutions out there with this sort of borrowing pattern but she's not sure exactly where and who they are, nor can she find a good way to identify them and quantify their balance sheet carrying capacity.

The counter-balancing problem, however, is that fixed-income laddered bond portfolios have been and are being murdered and those portfolios comprise the asset base of pension funds and insurance companies.

Both of these entities can hide this for a while but not forever, and the bad news is that the damage you embed in both takes just as long to run off as it took to accumulate.  If we were to stop the stupid right now it would be eight years before it all ran off from these portfolios!

This is why Bernanke ended QE but Yellen has so far refused to follow through.  She has embedded even more damage into the system than Bernanke had and if she doesn't cut it out five or ten years down the road all of these institutions that are dependent on laddered portfolios are going default on their obligations and eviscerate the finances of 50 million Americans.

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"We want to see inflation get back to 2%" - Yellen, just now

The Federal Reserve Act (Law) states:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Stable means unchanging.

The law is clear.

Yellen is again vowing that she and the rest of the Board of Governors have a policy to violate the law.

It is not an accident, it is intentional.

It is in fact stated policy.

It is a giant middle finger erected toward every person in this nation and has stolen trillions of dollars of your, my, and everyone else's money over the last 100 years.

INDICT EVERY ONE OF THE BOARD OF GOVERNORS RIGHT NOW or shut the **** up about everyone else who chooses to disregard the law -- any law.

If theft at such a grand scale that fully half of everything you earn over a ~30 year time period does not lead to indictment and imprisonment then there is literally no law that anyone is duty-bound to respect.


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Now you have it, and the market is going to have to deal with it.

For immediate release
Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

In other words there's no emergency -- but rates are at emergency levels.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

In other words, there is no emergency, and no indication that there will be.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, 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 and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

In other words -- there is no evidence of an emergency, we have emergency rates, and uncertainty never completely disappears.

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. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

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.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

Good luck folks -- The Fed has now said that despite things being "ok" no move from emergency rate levels has or will take place.

They're out of bullets but they recognize that the likely hissy fit in the market will come when they do move -- but they didn't move.

The economy -- and markets -- are not going to like this one bit when they figure out the implications of this policy announcement.

PS: The only thing The Fed has to sell is the illusion that they're in control.  How soon we forget what happened in 2008 and their "control" shortly after Bernanke assured everyone that they were in control......

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