The Fed Put
Do you really think the Fed is in control of anything now?
I don’t. Internal Fed feuds offer a hint of that as well.
And if the Fed is not in control, then it’s not a matter of “let”, it’s a matter of “try”.
— Mike “Mish” Shedlock (@MishGEA) February 16, 2022
The Greenspan Put
Danielle asked an interesting question, especially in light of the “Greenspan Put“.
Greenspan put was the moniker given to the policies implemented by Alan Greenspan during his tenure as Federal Reserve (Fed) Chair. The Greenspan-led Fed was extremely proactive in halting excessive stock market declines, acting as a form of insurance against losses, similar to a regular put option.
Market participants had widespread belief that former Fed Chairman would protect the market.
That belief held until the DotCom crash.
If former Fed Chair Ben Bernanke could stop the housing bubble from collapsing, then he surely would have.
If anything, this “put” belief reinforces collapses.
If market participants believe the put is at the 3700 level, then I can assure you there will be massive short covering at or near that level.
Q: Then what?
A: When beliefs crash and the shorts have already covered, the bottom falls out.
There is no put and it is not a matter of “let”. The Fed can attempt to influence, but it is not in control.
Control What?
Agree the Fed’s massive balance sheet gives them ample opportunity to play games to TRY to stop inversions via Twist operations.
But controlling inflation, yields, and the market? Roughly ZERO chance.
The Fed can at most strongly influence only one variable at a time.
— Mike “Mish” Shedlock (@MishGEA) February 16, 2022
The Fed can control short term interest rates. Judging from Japan, it can control the entire yield curve.
But to do so, the Fed would have to announce, then do, what the Bank of Japan (BOJ) has been doing for a decade.
BOJ Makes Unlimited Bond Purchases to Limit Rates
Please note this recent announcement: BOJ Makes Unlimited Bond Purchases to Limit Rates.
BOJ officials say they will buy an unlimited amount of government bonds at a fixed rate. It is the bank’s first such move in about three years and seven months.
A sell-off in Japanese government bonds has recently been intensifying. It pushed yields on the benchmark 10-year bond up to 0.23 percent on Thursday, which is the highest level in about six years and one month and close to the cap the BOJ has set.
Lovely. The Fed could conceivably do the same.
At What Cost?
You have “control” using the word loosely, of at most one thing at a time.
The Fed can lock rates by buying unlimited bonds, but it cannot lock inflation at that price.
Can the Fed Control Inflation?
No, if it could, then why did the Fed try to get 2% inflation for a decade and fail spectacularly?
Now the Fed has the opposite problem. The Fed believed for a year that inflation was transitory, so much so that it ridiculously kept its finger on the QE throttle?
Despite the fact that the Fed clearly lost control of inflation, there is a question as to whether the Fed will “let” the stock market fall.
The Fed Can Try
The Fed can try, but a little man once told me there is no try.
The Fed cannot “do” because it is not in control.
What About Housing?
Any illusions of control must also factor in housing and housing bubbles.
What will 4% rates do. 5%? Yet, the Fed wants to unwind its balance sheet, especially mortgage backed securities.
How does that magic work?
In practice, it’s a lot easier to add liquidity than take it away.
What About Credibility
The recent statements by St. Louis Fed President James Bullard are amusing.
I commented on that in James Bullard Says Fed Credibility Is On the Line, Repeats Faster Rate Hike Message
Bullard Statements
- We have the hot CPI report. Not so much that report alone, but the last four reports taken in tandem have indicated inflation is broadening and possibly accelerating.
- I am just one person but I would like to see 100 basis points on the policy rate by July 1.
- “I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation.
- This is a lot of inflation in the US economy. 7.5% on the headline CPI. These are numbers Alan Greenspan never saw and haven’t occurred in 40 years.
- Our credibility is on the line and we do have to react to data.
- I think the inflation we are seeing is very bad for low and moderate-income households. Real wages are declining. People are unhappy. Consumer confidence is declining. This is not a good situation.
Look at points 1 and 5. Inflation was running hot for 5 months and not once did Bullard dissent.
Now he comes with guns blazing attempting to maintain credibility when there is no credibility to maintain, not even his.
Highest Inflation in 40 Years!
The Fed claims it will be data dependent while ignoring the highest inflation in 40 years and that does not even count housing prices, NFTs, speculation in cryptocurrencies, or any other numerous (and obvious) examples of inflation.
Data dependent claims are an obvious lie.
Fed Uncertainty Principle
Let’s review my Fed Uncertainty Principle.
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 simply 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.
Appearance of Control
At times the Fed appears to be in control. But it’s a mirage. The mirage of control happens when the Fed’s interest and the markets are aligned.
The Fed “tried” to produce inflation, and actually did. But the inflation was in financial asset bubbles not where the Fed wanted inflation (routine consumer prices).
The market was very pleased with this “trying”.
But liquidity is another thing the Fed cannot control. The Fed can increase or remove liquidity by interest rate policy, QE and QT but it has no control at all over where liquidity flows or drains.
Fed liquidity produced the third major bubble in just over 20 years.
Now the market is unhappy that the Fed trying (but not very hard) to contain inflation. However, the Fed cannot try too hard or the stock market will collapse.
The Fed could possibly contain inflation by hiking the Fed Funds rate to 2% tomorrow. But the stock market would crash and so would the global economy along with demand for nearly everything.
Delusional Fed President Hopes to Steepen the Yield Curve Via QT and Rate Hikes
The lead chart is from Delusional Fed President Hopes to Steepen the Yield Curve Via QT and Rate Hikes
The yield curve is flattening fast. And the Fed wants to steepen it. If the Fed could control this flattening, then why doesn’t it?
So, is the Fed really in “control” of anything, or is the whole damn thing an illusion?
This post originated at MishTalk.Com.
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Mish
I agree the Fed isn’t doing or likely to do enough to quell general inflation. They’re hoping a slowing economy will do it for them. I tend to think we’ll get deflation in financial assets and inflation in other goods and services, so stagflation from a CPI viewpoint.
2% tomorrow. But the stock market would crash and so would the global
economy along with demand for nearly everything.”
How about some discussions on a us default.
control would be reinstating the Glass Steagall Act with no amendments.”