A chicken and egg scenario involving the Fed has emerged. Who is following whom?
Traders Trim Bets
This headline just crossed: *TRADERS TRIM NEGATIVE-RATE BETS AS POWELL SAYS VIEW UNCHANGED
In other words, Jay Powell says exactly what everyone expected him to say, and for some reason, there are folks out there who are still surprised.— Lisa Abramowicz (@lisaabramowicz1) May 13, 2020
Since we’ve established that the Fed actually follows the markets, do you think negative rates would be “an option” if the markets go there first (in treasuries)?
— Will Wolf ✌🏻 🚀 (@throughnothing) May 13, 2020
Does the Fed Follow the Markets?
It appears that way, but if all the Fed does is follow the markets, why do we need the Fed at all?
Fed Uncertainty Theory
I discussed the above question in detail, on April 3, 2008, before the collapse of Lehman in the Fed Uncertainty Principle.
It is still one of my favorite posts. Here are the key ideas.
The Observer Affects The Observed
Most think the Fed follows market expectations.
However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn’t the market to blame if the Fed is simply following market expectations?This is a very interesting theoretical question.
While it’s true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.
I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.
Fed Uncertainty Basic Principle:
The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.
Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three:
Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four:
The Fed does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
Negative Rates?
No, the Fed may not know much but it has observed that negative rates did not help either Europe of Japan.
It’s easier to see someone else’s mistakes than your own.
Fed Beholden to Banks
And whereas the ECB punished European banks by charging interest on excess reserves, the Fed paid the banks money effectively bailing them out over time.
Given the Fed is beholden to the banks,the Fed will not set rates in negative territory although it may be possible for rates to go a few basis points negative for technical reasons.
Why Are We In This Mess?
In regards to corollary number 1, we are in this mess because once again the Fed held rates too low, too long blowing another huge asset bubble in the wake.
There Are No Temporary Measures, Just Permanent Lies
In regards to corollary 4, the Fed announced that it will buy junk bonds. This exceeds its legal authority, adding to illegal actions it took fighting the Great Recession.
Supposedly, junk bond buying is temporary.
But as I pointed out, There Are No Temporary Measures, Just Permanent Lies
Gold vs Faith in Central Banks
Buy Gold
Stephanie Pomboy, President-Meridian Macro Research, summed things up nicely in two short sentences.
https://twitter.com/epomboy/status/1260719930619691016
“The Fed is clueless. Not like a little clueless…like A LOT clueless
“
“Buy Gold“
Mish
Negative interest rates will cause trillions of dollars to try to move somewhere, it would be very ugly in my opinion.
Is there anyone who really thinks in the real bond market that someone would pay you to borrow money from them? Especially considering you probably will not be able to repay the loan????
In a deflationary environment, the Fed has to follow the market to lower interest rates. Nobody is taking out loans at high interest rates. In a deflationary environment, you have no confidence that you won’t have to cut prices which will pressure your ability to make loan payments. Having high interest loans is insanity.
In an inflationary environment, the opposite is true. The point is, the Fed doesn’t set interest rates. It manages them within the prevailing winds of the economy. The Market sets interest rates, and those rates are low. Due to deflation. The Fed is just stabilizing the amount of liquidity needed for the markets to function effectively, at whatever interest rate the market finds acceptable.
Nasdaq is about to hit all time highs?? What deflation are you talking about? Who cares if asset prices continue to inflate to infinity and beyond
Well, well, well …..
Goldman Sachs’ Hatzius on why he’s not ruling out negative interest rates
Jan Hatzius, Goldman Sachs chief economist, joins ‘Closing Bell’ to discuss why he still thinks the Fed could use negative interest rates to help the economy and whether the U.S. could recover in the second half of 2020.
In June 1981. Merrill Lynch made one of the greatest market calls in history. Full page ads in all major publications. The title read “Bonds, dawn of a new bull market” i was a broker at Merrill then and took that market call to heart.
The FED’s partner in crime is the FDIC. Both created the moral hazards necessary for banks to take excessive risks with people’s savings, while discouraging depositors from holding banks accountable by choosing to hold cash/gold instead of lending to banks. The government reinforced the moral hazard by passing laws restricting how much cash may be deposited or withdrawn at any one time.
Buy gold, 40 years ago gold hit 850oz. an investment in long term zero coupon treasuries beginning in 1982 and with a long duration maintained returned 12 pct compounded over that period making that 850 worth $60,000 today. Gold at 1700 has doubled in 40 years. 1.8pct compounded. Every dog has its day.
Vastly different circumstances today. Interest rates peaked at over 21% in 1982 and are near all time lows in 2020. Long term zero coupon treasuries only make sense if you believe interest rates are going more than a little negative.
FYI. I remember getting more than 14% on a 30 month CD back then. How times have changed.
Nice call there Monday Morning Quarterback elvis07. You probably could have made more than 12% investing in Elvis paraphernalia in 1982.
So what are you going to do with your 50k (after taxes) today? Thats the question. We all know what we “should” have done.
Now retired. those dollars have been in 5.25 tbonds due 2028.
How old were you 40 years ago anyway ? But lemme tell you , Gold was between 200 and 300 oz, only 20 years ago, before free money MADNESS took hold of the financial system….go figure where it might end at one point with free money gone berserk !
Is the “free” money really free?
Seems to me the Fed’s balance sheet is growing while the rest of American (outside of Walmart, Amazon, big pharma, etc) is shrinking…
Now that the FED has opened the free money floodgates for once and for ever, they should also send a couple of trillion dollars to South America, so people can live happily without even coming to the US in search of the American Dream ….hahhahaha ….we re on the road to nowhere (to the cliffs rather ) but we don’t care ! GOOD LUCK to everone ….and myself in particular !
We’re in this mess because the central banks (i.e. the committee of wise men) should never have been allowed to set interest rates. The demand for credit should guide interest rates. If it goes baloney, so should the interest rates; not print more money to keep to a target rate.
The rest is the compound interest on a stupid idea.
“Only a free market does”
–
Intervention is part of a free market.
Ridiculous – There would not be a Fed ina free market
Makes me wonder, all of the time, WHAT exactly is going to happen with so much ingnorance, or indifference rather, out there….BIG BROTHER will do what the 0, 000001 % suits …..personally I belong to the 1%, for the time being, but that won t be for long, of that I am sure ….
If one takes the position that any action by any party operating within a “free” market is designed to intervene or control or manipulate or otherwise make the market not “free”, then there is really no such thing as a “free” market. A party takes actions to monopolize … if they succeed no longer a “free” market … if you act to restrain monopolization, same result.
The same principle would apply to the concept of a “free” society. A party decides it is advantageous to impinge upon the freedoms of others … if successful the others are no longer”free” … as soon as you pass a law designed to prevent that impingement, you no longer would have a “free” society.
In both cases, human nature is the “wild card” and there is always going to be some individual(s) or some group(s) of people who want an unfair advantage in a “free” whatever and either they will do whatever it takes to achieve that or a law has to be passed to outlaw such activity and in either case the “free” whatever is no longer “free”.
All “freedom” contains within itself the seed(s) of its own destruction … human nature / the need to restrict it.
We see that playing out in what some here think is their “freedom” to do as they please and others thinking that “freedom” comes with “responsibility” that either must come naturally to all (HA!) or must be enforced for the sake of all.
The bottom line is that the free market that Mish and others describe never existed. It never has and never will. Does anyone’s existence anywhere in the history of time ever NOT had some level of intervention ? It hasn’t.
Then the goal becomes: “How do we minimize intervention.”
Not “Oh, well, since there is a guy somewhere in Papua New Guinea trying to intervene in the seashell market, there is no free market. So we may as well be like North Korea and North America.”
There may, per your definition, have been “some” government intervention in whatever trading Jedediah Smith did in the Rockies with the bears and natives he ran across back in America’s civilized era, but it was surely a lot less intense than in the kleptocratic terror state America has degenerated into since.
So, at least as a start, let’s then get to that level of intervention. Then we can see if we can go further. You’d think at least that could be something everyone could agree on.
Most of north American discovery was funded by the kleptocrats in Europe. You can believe it wasnt but explorers got funds from kings and queens. There was never a market with minimal intervention. Intervention by kings and queens was part of the free market.
Again: The goal then become to replicate the level of access to surveillance, taxation, interference in what guns he carried, and time and resources it took to send someone from London to arrest him; if his gunbarrel was “deemed” “too short,” or he was a few days late “reporting” his “income,” or the bear proof door of his log cabin violated some arbitrary “zoning law”; that a European king had access to, wrt Jedediah Smith.
Do that, and intervention, while you are free to claim it technically existed even then, is an awful lot less onerous than it is now. To the point of not being utterly and completely incompatible with anything resembling a free society, even.
Oh, and also: When The King has confiscated absolutely every possible resource from his subordinate population, it is rather tautological that he must, indeed, be involved in anything any of them do which requires access to any of said resources. Hardly means people wouldn’t be better off without him, as it’s not as if the King was the one who created the resources to begin with. The Mafia interfering in the teamsters, doesnt somehow prove transporting things by truck, requires the Mafia.
We may not like it but the Fed is the lender of last resort and they are backed by the Treasury. They won’t go negative but 0% is an option until the economy starts recovering. Banks cannot be profit centers in a depression-scenario but the banking system is backed by the Fed. We have MMT by another name.
what kind of currency does it take to buy gold or other “precious” metals or commodities ?
is that actually you , asking this question ? Must be my english…..
“Given the Fed is beholden to the banks,the Fed will not set rates in negative territory although it may be possible for rates to go a few basis points negative for technical reasons. “
…
Sort of pregnant? Negative still negative. You are probably correct in that FR won’t set a negative rate, but never a basis for my negative yield call. Instead $US denominated assets will be target for carry trade. King Dollar + treasuries with positive yield will be enticing for many foreign investors … considering the alternatives.
The Fed is not “beholden” to banks. The Fed is owned by banks, and maintaining the stability of the banking system is it’s core mission.
“..and maintaining the stability of the banking system…”
Which is, of course, nothing more than Newspeak for “facilitating banksters robbing their more competent and productive superiors, to as great extent as possible.” Which is, indeed, The Fed’s core, and only, mission.
It’s also Newspeak for “beholden to banks”
Wont the Government issue enough new debt to meet the foreign demand, & if not could the Fed not sell some of the treasuries it bought via QE ?
The Fed is actually private and owned by the banks in their regions, unlike most other central banks like BOJ and ECB. Negative rates are horrible for bank profitability and share prices, and bank share prices matter a lot to the US Fed. Therefore, no negative rates. The ECB doesn’t care much about European bank share prices.
True, but if negative yields support their loan collateral?
Not to mention big Wall Street banks are sitting on $trillions in treasuries … a nice pay out via capital gain if rates went negative.
“The Fed will be disingenuous about what it knows”
The FED has always been fearful of an audit.
The books are there to see. Anyone can audit them. It would be pointless because they aren’t really hiding anything. They never were.
Exactly. They don’t have to.
Anyone with a brain can look at what they do and understand that it’s going to end poorly.
People don’t want to know.
End poorly depends on who you are and what you do under this system or any system. There is no system that has ever existed where most of people prospered most of the time.
“No, the Fed may not know much but it has observed that negative rates did not help either Europe of Japan.
It’s easier to see someone else’s mistakes than your own. “
…
Yes … and, So?
I’ve mentioned this before, but when Larry Summers was assistant Sec of Treasury under Clinton he gave a speech castigating Japan for zombifying its economy to protect its banks … and how US banks were the envy of the world with reserves / regulations. Fast forward to 2009 … Summers all for protecting banks with TARP + FASB 157 (move to mark to model).
Funny how things change when shoe on other foot.
Rates will go lower as look upon as best of bad choices … and, of course, Mr Stock Market will want it to fuel its TINA image.
Excellent comment
Now, say my name
….Heisenberg
You’re goddamn right
The Fed’s purpose it to keep banks in charge of the country. What they do they do for the best interest of the banks, and not the public.
We will never be a free or prosperous until the Fed is abolished.
We will never be free and prosperous until we outlaw fractional reserve banking. Without FRB, there’s no reason for a Fed.
Well, the Fed did follow Japan into QE territory, didn’t it? They would have known it didn’t work. That didn’t prevent it from doing it anyway.
The Fed has a super high batting percentage when it comes to making markets go higher. Clueless? Only for people who are short.
Also no one can stop the Fed.
“Also no one can stop the Fed.”
Jihadi Muzzies will. In the end, good, even if only in a relative sense, will triumph over evil, after all. There is enough inertia that it may take a while, though. Unfortunately.
Wrong.
The Fed will wind up stopping themselves. They will eventually “put themselves out of business” when the inevitable (hyper-)inflationary episode occurs and they are powerless to stop it. This is when their “currency-issuing franchise” will end up being terminated and their charter revoked, by popular demand. The FRN will be replaced with a new currency in something akin to a 1-for-20 reverse stock split.
Although this may not happen any time soon, we are well along the path towards this all too certain outcome.
I think you are being too optimistic. It will take nothing less than a revolution or/and the country collapsing to make the Fed go away. Also people want free spigot of money now, so I would say the Fed’s pretty popular. No politician in his/her right mind will question what the Fed is doing, otherwise he/she will be voted out.