Japanese Style Price Fixing by the Fed is On the Way

Mish

The Fed is tired of fighting the markets and using QE to force interest rates where it wants. Instead, it will follow the path of the Bank of Japan.

Price Fix is In

A Wall Street Journal editorial note the Jerome Powell Price-Fix Is In.

The latest idea whose time has come and gone and come again is yield-curve control, which is shaping up to be one of the Federal Reserve’s next party tricks. This tool would involve the Fed setting interest rates by diktat for the first time in 70 years, and Governors are warming to the idea.

Backers say the policy allows central banks to manipulate rates without expanding their balance sheets ad infinitum. This argument appealed in Japan, the Frankenstein’s lab of monetary policy, where two decades of quantitative easing left the central bank with relatively few outstanding government bonds to buy.

The Fed last experimented with this policy in the 1940s as Washington struggled to finance World War II.

If Mr. Powell thinks President Trump’s Twitter feed is bad for Fed independence, wait until the chairman starts manipulating rates outright. The danger will grow more acute the more indebted the federal government becomes from pandemic response and Baby Boomer entitlements.

The world needs a market price for the 10-year Treasury yield, and Mr. Powell is threatening to take that away.

News Flash 

I have news for the Wall Street Journal: 

There is no market price for treasuries right now. 

Forcing down interest rates by QE where the Fed wants is not a market price. 

Credibility Boost

Straight from the Twilight Zone: "Governor Lael Brainard argues that forcing medium-term rates downward would bolster the Fed’s credibility."

Yes, about as much as mandating the price of orange juice or steel.

The Wall Journal gets back on track with its conclusion.

We don’t know what price the global economy would pay for such a policy in economic distortions or financial instability. The Fed doesn’t know either. No one should be eager to find out.

Mish

Comments (52)
No. 1-16
ZZR600
ZZR600

I'd like to know the prognosis for GBP in the medium term. If any currency is ripe for trashing it's Sterling

IA Hawkeye in SoCal
IA Hawkeye in SoCal

I'll be quite honest. As long as they hold home values up for 25 years, that's about all that matters. It will likely be 0.5% loans to do it, but as long as I can retire and also pass down the home to my kids, that's the best I can do. Beyond that it's too far out to predict, and the kids that will have to grow up past that won't even be born for 25+ more years. If they are born at all.

Tony Bennett
Tony Bennett

"Backers say the policy allows central banks to manipulate rates without expanding their balance sheets ad infinitum."

...

Well, that is sort of happening now. "Investors" are front running the Federal Reserve at every turn. The SPV created in the Spring (with US Treasury and due to end by October) could purchase UP TO $750 billion in corporate bonds.

I checked the most recent FR balance sheet. The Total purchases to date of bonds / bond etfs / commercial paper / munis only about $100 billion.

I've been making the point that the Federal Reserve's bark a lot worse than its bite. When Federal Reserve makes an announcement, they KNOW "investors" will front run them leaving them without much to do.

Now when the Losses start to show, in earnest???

Will prove to be an "uh oh" moment for many.

edit: Federal Reserve just extended emergency lending till end of year.

Bam_Man
Bam_Man

Looking more and more like the old Soviet Union every day.

Tony Bennett
Tony Bennett

Republican Senators Collins and Romney will oppose Judy Shelton.

RonJ
RonJ

"We don’t know what price the global economy would pay for such a policy in economic distortions or financial instability. The Fed doesn’t know either. No one should be eager to find out."

No one is eager to find out what is is on the other side of the coin, either. That is why we continue to get more of the same.

Collective memory fades with time. Who personally remembers a time when the FED did not exist? Who personally remembers a time when the government did not interfere in the economy during a recession?

dr smock
dr smock

Ben & Jerry's along with Janet's appetite for bonds has been stupendous over the last 10 years, and the bond market vigilantes have been long gone. But set it and forget it is just plain chicken fodder

Scooot
Scooot

If I understand correctly, instead of The Fed setting the rates by buying Treasuries as they do at the moment, they’ll do it by Diktat. So who will buy the Treasuries to finance the deficit? How does it work in Japan?

AWC
AWC

All else aside, the Fed obviously doesn’t like Au going over the $2k mark. Think I might sell a portion to the Robinhood Crusaders here.

Could use another casa, and some rental income. Not getting much of a return on Tips and Doorstops.

killben
killben

Is it at all possible that the Fed might throw up his hands one fine day?

tokidoki
tokidoki

The Fed alone? Hard. With BLK's help sure.

Augustthegreat
Augustthegreat

But the U.S. is the beacon of Free Market Economy!

Casual_Observer
Casual_Observer

These "markets" are all manipulated by the Fed the same way BoJ has been manipulating Japanese markets for decades. It is another way of extending and pretending.

ColoradoAccountant
ColoradoAccountant

You can't sue your economist for malfeasance because no state has given them a license to practice their profession. Let that sink in for awhile.

PicoManning
PicoManning

The FED knows the currency solution lies with Congress. But for reasons of moral compromise no solution exists. So the FED's left holding the bag. But the FED has never has been an innocent bystander. It's just that now, as Congress ignores economic plight and looks the other way, the FED is given the job of driving an increasingly heavy dump truck down a narrowing road at increasing speed.
And in the backs of people's minds is an odd sense that something seems increasingly wrong. Invest in ammo.


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