The Fed Doubles Down on Mistakes Despite Rampant Speculation

Mish

As expected, the Fed holds interest rates steady and announces it will continue QE.

Commitment to Blow Bubbles

The lead image is from Fed Holds Policy Steady as Economy Stumbles.

The Fed's Lovey-Dovey All Around FOMC Statement shows the Fed's commitment to blow bubbles is still intact.

Eight Key Takeaways

  1. Whatever It Takes: Undertake open market operations as necessary to maintain the federal  funds rate in a target range of 0 to 1/4 percent.
  2. 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.
  3. Accommodative Financial Conditions: Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. 
  4. Let Inflation Run Hot: With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. 
  5. No End Date to Accommodative Stance: The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.
  6. Pile on More QE:The Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.
  7. Roll Over QE Auction Proceeds: Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS.
  8. Set Low Primary Credit Rate: The Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 0.25 percent.

Bubbles? 

In its statements, the Fed made no mention of the obvious bubbles it is blowing. Powell did take questions on speculation in the Q&A that followed. 

Price Stability

Fed chair Jerome Powell would not recognize price stability if it jumped out of the audience and spit grapefruit juice in his eye.

Somehow the Fed is wedded to a goal of 2% inflation with no explanation as to why the goal should be 2% in the first place.

The Fed's commitment to 2% inflation is galling. It cannot see the rampant inflation right under its nose or it is purposely looking the other way.

Offsetting Errors

The idea that one can offset errors by further errors in the other direction is pure nonsense.

It's as if a doctor said "For the last three months we gave you too little medicine so for the next three months we will give you too much." 

No Economic Benefit to Inflation

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.

Asset Bubble Deflation

Consumer price Inflation may be tame, assuming you believe the CPI.

It’s asset bubble deflation that is damaging. 

Q&A on Bubbles

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.

The problem is not deflation, it's the Fed's misguided attempts to prevent it.

Asset bubbles in housing and speculation in stocks like GameStop are as obvious a Pinocchio's nose. 

In the Q&A after the meeting, Powell dismissed asset bubbles saying they were based on speculation on vaccines and fiscal policy, not monetary policy.

I disagree. Interest rates are ridiculously low at 0.25%. Real interest rates are hugely negative, way more than widely believed factoring in housing prices. 

 The Fed is doubling down on mistakes.

Mish

Comments (59)
No. 1-27
Mr. Purple
Mr. Purple

We've hit a permanently low plateau (flood plain???) on interest rates. Seriously, can anyone see the Fed raising rates ever again?

Jackula
Jackula

I don’t think he has a choice. Interest rates are effectively slightly negative. Pushing em lower will blow up US (world) capital markets. Only other way I see to keep this reflation game going is UBI. Otherwise asset prices crater as debtors go insolvent.

Eddie_T
Eddie_T

Low rate mortgage loans amortize a lot faster than high rate loans.....that’s another way to stack wealth using this cheap mortgage money...if I could get one more house right now...with say a 3.5% loan...that would probably make up for the higher current price I’d have to pay for the house.....in the long run. It would be an interesting math problem to look at that.

Mish
Mish

Editor

The Q&A with Powell just ended. I put a link in the post.

Doug78
Doug78

The FED is riding a tiger; we all are and we don't know how it will end. The alternative would be mass unemployment in the developed wold leading to who-knows-what. Very few people believe in MMT and even fewer wanted it to be policy but with COVID there was no choice. In 2008 you could make a case of bailing out one sector and then depend on the trickle-down effect to bring back prosperity. Something like that now is out of the question. It's going to be an interesting next ten years. Is that why Mish moved to Utah?

Doug78
Doug78

We are imitating China in just about every way now with dirt-cheap credit leading to financial and asset bubbles but also generating a booming economy, at least that's the plan (or hope) now.

Sechel
Sechel

The Fed is very clear, in their view the risk of economic slowdown exceeds the risk of a bubble. I don't agree but their language and actions leave no doubt.

PecuniaNonOlet
PecuniaNonOlet

This begs another question, are we at or near peak consumption? With the exception of healthcare, how much more can an aging and dying demographic consume? I know Jay Leno collects cars but that doesnt interest me.

I wrote a while back that the fed or biden could send me a check for $10k and I would not know how to spend it. There is nothing I need but I could blow the money on stuff I dont need.

China is already building cities that no one needs or wants, is that next here?

If we are wasting money, why not replace aging infrastructure like bridges or high speed internet all over the US?

The fed needs to have a radical plan for post comsumption America and post globalization. Seems embracing deflation with a plan is prudent.

JoeJohnson
JoeJohnson

Honestly I thought for today's era this was pretty hawkish. No expansion of eligible debt? The train has left the station, even a ever so slight tightening will trigger meltdown in the economy.

ajc1970
ajc1970

Blockbuster Video's stock had its best day in over a decade.

You call it a bubble but I say that's the market looking ahead.

VHS is coming back.

Eddie_T
Eddie_T

Betamax.

LawrenceBird
LawrenceBird

If the 10yr were at 5% where would S&P 500 be? I don't think 3800!

Felix_Mish
Felix_Mish

Speaking of CPI inflation, as a thought experiment: Close down national borders for commerce. There are too many such noises out there for comfort. Talk about a global-cooling level disaster waiting to happen.

truthseeker
truthseeker

Hedge funds are trapped with their short positions in GME and want a bailout. Extremely low interest rates encourages bad behavior as borrowings increases leverage even more, so here we go again it seems

RonJ
RonJ

"Fed chair Jerome Powell would not recognize price stability if it jumped out of the audience and spit grapefruit juice in his eye.

Somehow the Fed is wedded to a goal of 2% inflation with no explanation as to why the goal should be 2% in the first place.

The Fed's commitment to 2% inflation is galling. It cannot see the rampant inflation right under its nose or it is purposely looking the other way."

The FED has an agenda. The FED chairman doesn't see what the FED chairman doesn't want to see.

Bernanke was asked why the FED still kept gold. He answered, "tradition."

ColoradoAccountant
ColoradoAccountant

Why does the Fed hate savers? Why won't the banks pay for savings? Why is money basically free? Because it has no value anymore?

PecuniaNonOlet
PecuniaNonOlet

Slightly off topic but it seems the whole Game Stop stock fiasco has now made big tech shutdown the reddit board wallstreetbets. Wall Street hedge funds didn't like getting stomped out by a bunch of millenials pumping stocks on the internet.

Seems the SEC is getting involved but now sure what they can do about the whole fiasco.

njbr
njbr

And as for what is driving all this distortion....

From the NYT...

The monoclonal antibody treatment made by Eli Lilly is powerless against a variant of the coronavirus discovered in South Africa, according to a new study posted online on Tuesday.

In addition, one of two monoclonal antibodies in a cocktail treatment made by Regeneron also is significantly less effective against that variant, although the combination still works, researchers at Columbia University reported.

The findings underscore growing concerns that because of new mutations in its genetic material, this variant, called B.1.351, may be able to resist antibodies contained in these treatments and perhaps those created by the body following vaccination.

bradw2k
bradw2k

Been listening to Fed Up. You know I think the Proud Boys attacked the wrong building in DC. Seriously populist revolts are springing up left and right, when does a ragtag group short squeeze the Fed?

Johnson1
Johnson1

Marketcap of US homes increased over 2 trillion in 2020. Value of all homes is $36 Trillion.

Call_me_Al
Call_me_Al

"The Fed Doubles Down on Mistakes Despite Rampant Speculation"

"There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy."

So the folks making the alleged mistakes are the ones that benefit? How sure are you that the actions should be classified as mistakes?

Eddie_T
Eddie_T

"The winners are those with first access to money, namely the banks and the already wealthy.”

And people who can qualify for a home mortgage. 30 year fixed rate money at 2.5%. As liabilities go, it's a good one.

""There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.”

And the homeowner and the owner of residential housing. If you have to pick being a winner or a loser I prefer being a winner. Not financial advice, Do your own DD.

Explains why housing is booming. One explanation anyway.

George_Phillies
George_Phillies

We see this publicity about a few companies whose stocks are caught up in a short squeeze, courtesy of all this money sloshing about. Stock prices soar. At some point, the historical tendency is that the bubble will pop, people will start wanting to sell stock beyond what the short sellers want, and the price of the stock will fall, very rapidly. Of course, money is conserved so buy and selling stock simply determines in whose bank account the money resides.

However, there is a complication that has not yet had much attention. Some of these folks trying to squeeze the shorts have been buying on margin. As the price of the stock soared, their net worth soared, meaning the amount of stock they could buy might have gone up a lot. When the price of the stock crashes, the apocryphal 22 year old instead of having $2000 in the bank is apocryphally in debt to her broker for 1.2 million dollars.

If only one 22 year old had pulled this stunt, well, they have to convince the court that they will not in a reasonable time be able to pay off the debt, so they can go bankrupt.

However, the broker actually had to pay for all that stock, because the seller undoubtedly took the money and ran. When a scad of 22 year olds pull the same stunt, then depending on legal details it is perhaps like the 2009 financial crisis, except now instead of taking down the banks it is the brokerage houses who face difficulties.

Boot6761
Boot6761

Mish, for the past 4 years you have blamed Trump for many things...is he still at fault here? It's a Big Club and we aint in it at the end of the day...When this bubble bursts there will be many many Close to Retiring boomers that will be very unhappy...and you know what...it shows that it doesn't matter what party is in the White House...


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