The Fed Feints
Great
hoopla over the Federal Reserve’s surprise decision to raise the
discount rate 0.25 % fills the media and the markets. Pundits discuss
earnestly the spice has been added to the tea leaves. Barry Ritholtz lists three possible motivations behind the Fed’s move:
- Response to political pressures;
- Proof the Economy is improving;
- Inevitable ending of extraordinary accommodation.
The relevance of number 1 can be discounted rather quickly. Where
could the “political pressure” come from? Other than lip service around
election time, Congress never demands fiscal or monetary
responsibility. It could refer to “hawks” on the Fed board, but they
would not overrule Bernanke on anything substantive, which this move
wasn’t. Thus points 2 and 3 appear to be possible motivations.
The rate move was miniscule. Its size precluded it from having any
meaningful economic effect. Thus, it must be interpreted as a “signal.”
But was it a signal meant to deceive? That is, was the move a “feint?”
The Fed traditionally sends a signal in advance of taking more
serious economic measures. The rationale for a warning is to prepare
markets for what is coming. It is believed that markets then adapt
somewhat in advance of the future, stronger actions. This move was not
a signal. As stated by John Williams of Shadowstats.com:
… the Fed has virtually no room to tighten credit in a
system where the real (inflation-adjusted) broad money supply is in
severe annual contraction, and where general bank lending into the flow
of commerce is not adequate to maintain economic growth.
The
Fed move was a feint designed to reinforce beliefs in points 2 and 3
above. But there is no economic recovery, and the Fed cannot stop its
extraordinary accommodation.
The end of March will provide the proof. That is when Mr. Bernanke
promised to cease Quantitative Easing. QE will not cease. There is not
enough market demand to purchase the boatload of Treasuries needed to
fund government deficits. New bond issuance needs to average $90 billion dollars per week this year. $40 billion is for new debt, while $50 billion is rollover of maturing debt.
If QE stops, the government defaults on at least some of its
obligations. It does not have the money to pay its commitments without
these bond proceeds. If Mr. Bernanke stops QE so does the Federal
government. If QE stops, so will Social Security checks and other such
payments.
Games will be played to attempt to cover up the continuance of QE.
These games were played this year. The ultimate test is the level of
Federal Reserve assets. What Mr. Bernanke claims is irrelevant. If Fed
assets are increasing, so is QE, no matter how surreptitious it may be.
Mr. Ritholtz ends his post with this appropriate quote from Ralph Waldo Emerson:
I cannot hear what you are saying because what you are doing is speaking so loudly.
The Federal Reserve was established as an independent agency with
goals to protect the banking system and the purchasing power of the
currency. It has failed miserably in both respects. Over time, it also
lost its independence and became highly politicized.
If Mr. Bernanke were truly to obey the charter of his agency, he
would not enable the government to continue its irrational and ruinous
spending. The fact that the government is dysfunctional is even more
reason for the Fed to act. To paraphrase Ronald Reagan:
Mr. Bernanke, tear down this government. Do what your office demands.
Mr. Bernanke will not do his duty. But that merely postpones the
inevitable. Markets will perform the task, and we will all be the worse
for it when they do.
Monty Pelerin posted this on American Thinker today.