The Federal Reserve: Fraud That Passes For Economic Policy

wizard-of-oz-dvdcoverThe Federal Reserve has spoken, again. And again they have said nothing worth hearing, but done so in serious language and tone. Does anyone consider this quarterly spectacle worthwhile anymore?

Every quarter, like some pagan ritual, this scene repeats. Market worshipers treat it as some profound economic emanation that has the potential to re-direct the economic fate of the nation. These economic cultists worship the notion that an economy can be centrally managed. The ritual is like a scene out of The Gods Must Be Crazy.

Each quarter the Fed makes its pronouncement which is little more than a repeat of the vacuous statement the quarter before. When I read it,  I keep hearing the booming voice from behind the curtain in the Wizard of Oz. There is no better comparison to this quarterly pageantry.

Next quarter the Fed will speak again, saying the same nothings!  Regardless of the condition of the economy, policy will not change. Regardless of how tortured, the policy will be rationalized. Mr. Bernanke or any first year economics student with a leaning toward becoming a con man could write next quarter’s statement today. That is how predictable and irrelevant this farce has become.

To understand the charade, the Aleph Blog summarizes the recent Fed statement in the table below. Following that, I offer some remarks as to my take on what is happening.

Redacted Version of the December 2012 FOMC Statement

October 2012 December 2012 Comments
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months. Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Remember when the FOMC cited the Tsunami in Japan for economic weakness that would soon go away?  More grasping at straws.
Growth in employment has been slow, and the unemployment rateremains elevated. Although the unemployment rate has declined somewhat since the summer, it remains elevated. So long as discouraged workers increase, this is a meaningless statement.
Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed.  The housing sector has shown some further signs of improvement, albeit from a depressed level. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. No real change – just word order differences
Inflation recently picked up somewhat, reflecting higher energy prices.  Longer-term inflation expectations have remained stable. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. Shades down their view of inflation, blaming energy prices. TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is now at 2.97%.The FOMC is wrong on inflation.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. No change.
The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. No change. CPI is at 2.2% now, yoy, so that is quite a statement.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. No change.Does not mention how the twist will affect those that have to fund long-dated liabilities.Wonder how long it will take them to saturate agency RMBS market?
The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it 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. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. 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, in January, will resume rolling over maturing Treasury securities at auction. Operation Twist continues.  Additional absorption of long Treasuries commences.  Fed will make the empty “monetary base” move from $3 to 4 Trillion by the end of 2013.
These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. No real change.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will closely monitor incoming information on economic and financial developments in coming months. No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. Explicitly says that they will buy more long Treasuries.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and theeconomic recovery strengthens. No change.Promises that they won’t change until the economy strengthens.  Good luck with that.
In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rateare likely to be warranted at least through mid-2015. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. Not a time limit but economic limits from inflation and employment.Just ran the calculation – TIPS implied forward inflation one year forward for one year – i.e., a rough forecast for 2014, is currently 2.01%.  The FOMC has only 0.49% of margin in their calculation if they are being honest, which I doubt.Next time, I will provide a graph.
The Committee views these thresholds as consistent with its earlier date-based guidance. New sentence, and it is not accurate.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. New sentence.  Giving yourself an out clause on the hard-and-fast promises made above?
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. New sentence. So what?
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. No change
Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate. Lacker sharpens his hopeless dissent against a flock of doves.  I like that he is opposing the QE, as well as the foolish promises regarding Fed funds.Unlike the rest, he cares about the institutional reputation of the Fed, and thus opposes asset-side policies.


I encourage you to read the Aleph Blog’s commentary regarding this chart.

Now, my take. The quarterly show pretends to be about the economy but it actually is not. The Fed knows that additional monetary printing will not solve the economic problems. These problems arose as a result of too much credit.

So, why does the Fed continue to print money? The simple answer is because the Federal Government demands it. Fed policy is expressed in terms regarding the economy but that is all part of the charade.  What the Fed is doing, pure and simple, is enabling the government to stay alive!. If the Fed stopped printing money, the government would be unable to pay things like Social Security and the military. Government is broke. It is a deadbeat except for the fact that it has this captive agency, the Federal Reserve, who prints money that allows the farce to continue.

If the economy were to recover (it won’t) then what would the Fed use as an excuse for its profligate behavior? What will they say when inflation becomes obviously higher than their acceptable range?

This sham is dangerous and cannot go on much longer.

 

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2 Comments

  1. Long before this nonsense began, the founders saw the problems associated with fiat currency:

    “We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver, no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” Daniel Webster

    Today, the fraud is carried to the extreme of not even bothering to print the “money”. The vast majority is nothing but ones and zeroes which enable banks to collect billions in annual interest on nothing more than entries in an electronic ledger.

    “Forward!”

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