Fed's "Whatever It Takes Moment" Is a Big Flop

Mish

The Fed issued a set of meaningless statements following its FOMC Meeting Today.

"We have seen some signs in recent weeks that the increase in virus cases and the measures taken to control it are starting to weigh on economic activity," Fed Chair Jerome Powell said at a virtual news conference on Wednesday, as reported by the WSJ.

Here are the highlights of a Press Release following the Fed's FOMC Meeting Today. 

  • Full Range of Tools: The Federal Reserve is committed to using its full range of tools to support the  U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
  • No Change in Fed Funds Rate: The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. 
  • Monitoring: The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy.
  • Balance Sheet Expansion: To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. 
  • Large Scale Repos: The Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.
  • Interest on Reserves: The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on required and excess reserve balances at 0.10 percent, effective July 30, 2020.
  • Do Whatever it Takes: Effective July 30, 2020, the Federal Open Market Committee directs the Desk to: Undertake open market operations as necessary to maintain the federal funds rate in a target range of 0 to 1/4 percent. Increase the System Open Market Account holdings of Treasury securities, agency mortgage-backed securities (MBS), and agency commercial mortgage-backed securities (CMBS) at least at the current pace to sustain smooth functioning of markets for these securities, thereby fostering effective transmission of monetary policy to broader financial conditions

Whatever It Takes

ZeroHedge commented Fed Goes "All-In"-er, Promises Low Rates For Longer-er; Extends Swap, Repo Facilities Into 2021.

But realistically, there is nothing shocking or new in today's announcements. And the announcement itself was boring.

Contrast this effort to the ECB and its bond crisis in 2012.

On July 26, 2012, ECB president Mario Draghi gave a famous speech that rocked the European bond markets.

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

Q: So what did Draghi do? 

A: Absolutely nothing. 

The ECB did not start QE until years later.

However, bond yields on Italian, Portuguese, Greek, and Spanish bonds plunged. A freefall in the price of gold lasted for years.

Italy 10-Year Bond Yield

Italy 10-Year Bond Yield 2020-12-28

Chart from Trading Economics.

Although the ECB took no direct actions, Draghi's speech restored confidence in the ECB.

Doing nothing worked for the ECB. Doing nothing will do nothing for the Fed.

But what else can be done? 

How about Japanese Style Price Fixing?

For discussion, please see Japanese Style Price Fixing by the Fed is On the Way.

That did not come up in the official comments but it's nearly certain to have been discussed. 

But when implemented, the Fed will have as much success as the Bank of Japan. In other words, none.

Mish

Comments (31)
No. 1-13
Tony Bennett
Tony Bennett

"Doing nothing worked for the ECB. Doing nothing will do nothing for the Fed."

...

A lot of bark ... not much bite .

When "investor" sentiment turns ... Look Out ... Below ...

Casual_Observer
Casual_Observer

We will get back to the decade of 1/1/1 as I had been saying as far back as 2017. 1% growth/1% rates/1% inflation. That will all look good compared to what Covid has done to the economy. Konichiiwa.

foxdbf
foxdbf

Whatever you say Mish. Who cares. The trillion dollar question to ask here is what is ahead? When does the house of cards collapse? And what happens when it does?None of your posts are going to help us predict that. And I'm not yet convinced that gold will save us. I am not buying more here at these prices.

And 'whatever it takes' was and is not a flop. It worked and works a lot longer than we all thought it would. And the guys in bitcoin and Tesla did a heck of a lot better than us deflation bears. The reckoning will come but so far we were more wrong than right. Time for some humility seems appropriate. Get ready for the top in SPX in June next year.

Fl0yd
Fl0yd

Doing nothing worked for the ECB. Doing nothing will do nothing for the Fed.

@Mish: Could you please explain the rationale or thought process leading to this statement?

Scooot
Scooot

They don’t seem worried about the dollar, the weakest link in their strategy.

IA Hawkeye in SoCal
IA Hawkeye in SoCal

Hey, there's 2 things you can do. 1) Sit back, wonder, worry, and exist. Or 2) Don't fight the Fed, if they are issuing credit and doing 2.5% re-fi's, take advantage and live.

I'm not saying to be irresponsible and take out more credit than you can afford, I'm just saying go out and live some life. You only have 1.

Fl0yd
Fl0yd

20 years of public exchanges and markets with little consideration of fundamentals is kinda long time. Isn't it?

tokidoki
tokidoki

As long as stonks are up, the Fed's successful. That's THEIR metric for success.

Call me again when stonk's down 30%.

Mish
Mish

Editor

  1. "Time for some humility seems appropriate."

  2. "Get ready for the top in SPX in June next year."

Perhaps you should pay attn to your own point 1 with a call like that.

George_Phillies
George_Phillies

"...increase its holdings of ... commercial mortgage-backed securities..." You mean, like, all those securities backed by mortgages that are going into default because businesses have gone broke? Are you going to eat the losses?

foxdbf
foxdbf

I understand your point Mish. Remember the date, just in case ...

Roger_Ramjet
Roger_Ramjet

The Fed's toolbox is, metaphorically speaking, nothing more than a collection of screwdrivers. Sure there are different sizes and different types of heads, but they all essentially do the same thing with the same effect. But at some point the threads on the screw are stripped (i.e. too much debt, collapsing dollar) and at that point, the Fed's screwdrivers don't work anymore.

The Fed will keep screwing (us), but their screwdrivers will no longer be effective. I think our economy's screws are nearly fully stripped.

anoop
anoop

this is not the time to be looking for, or being concerned, about bubbles. this is not the time to be concerned about the negative effects of any policy. it's a do or die moment, so this is the time to be doing as much as we can so that we don't die.


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