STAFF NEWS & ANALYSIS
Another Sorry Chapter in the Fed's Sad Saga
By Daily Bell Staff - December 16, 2015

The Fed is about to close a momentous chapter in monetary-policy history … The Federal Reserve is set to exit a historic monetary-policy era and enter a new one. On Wednesday, it will most likely raise its benchmark rate for the first time in nine years, ending the zero interest-rate regime that was designed to support the economy after the Great Recession. To do this, it would raise the target range of the Federal Funds Rate by 25 basis points to 0.25% to 0.50% in an effort to raise the effective funds rate and, by extension, borrowing costs. – Business Insider

Dominant Social Theme: The Fed, buffeted by forces beyond its control, will do its best to salvage the economy on behalf of you, the people.

Free-Market Analysis: Perhaps we ought to feel sorry for Fed officials, especially Ms. Yellen. We've read a lot about Janet Yellen's reluctant move toward a rate hike and she is certainly being cast as the Hamlet of Fed leaders, someone who is indecisive because she knows how much can go wrong.

In other words, she cares too much. Unlike Hamlet, her agonizing does not revolve around a personal dilemma. No, her indecision is rooted in her concern for others.

Now it seems, Yellen is determined to hike – or so we are told – even though her decision is truly fraught. We can see from the above Business Insider excerpt that the Fed is possibly on the cusp of a "historic" decision.

Here's more:

At 2 p.m. ET on Wednesday, the Federal Open Market Committee (FOMC), which sets the Fed's policy, will release its statement, followed by a press conference with Fed Chair Janet Yellen.

Why raise rates now? With the unemployment rate at a seven-year low and stable jobs growth recorded over the past few months, the Fed is confident the labor market will continue progressing toward full employment. Wage pressures that companies have anecdotally reported for much of the year, and present in some of the economic data, also stoke the Fed's conviction in the labor market, and in accelerating inflation.

Yellen has stressed that the risks of delaying the start of policy normalization outweigh those of moving immediately. Put differently, the Fed would rather avoid a situation where it has to play catch-up and tighten financial conditions too quickly in the future than take the risk of not having enough runway to lower rates later.

The potential for an upcoming hike has given the mainstream media the ability to indulge itself for months as regards Yellen's obvious reluctance. It's certainly been a humanizing event.

Unlike Alan Greenspan, who seemed to relish his role, or Ben Bernanke who played mad scientist during the depth of the Great Recession, Yellen seems to us to come across as a cautious technocrat who is at once fearful and even sorrowful about the role she must play.

We once speculated that Yellen's role as Fed chairman was a kind of sacrificial one. She has to pretend that the economy has "improved" because otherwise she has to admit that the huge Fed effort at normalization, including trillions of dollars of stimulus, has been for naught.

In other words, she has to move the narrative ahead and, really, she has no choice in the matter. Of course, perhaps she believes in the numbers she's been given and the options that she's been counseled to take. But she's been sitting in the seat of power for a while now and we have trouble believing she isn't aware of at least some of the fakery.

Independent analyst Mike "Mish" Shedlock has commented on this topic in an article entitled, "Fed Openly Discusses 'Permanently High Balance Sheet'." He points out that there is a good deal of breast-beating over the Fed's portfolio of bank reserves – several trillion in all. These are funds that banks have left with the Fed in order to derive interest. As rates rise, the Fed will be in the position of making increased interest payments to these banks, a situation that may not be politically palatable.

Shedlock concludes, "The Fed never had any intention of shrinking its balance sheet by any other method than holding bonds to termination over time, if that … There is no debate. The Fed will do whatever the hell it wants while labeling the result a new 'tool.' Anyone who genuinely believes this is some sort of "new twist" should wear a scarlet sweater with the tag 'gullible fool'."

Good point. The Fed is Wall Street's longest running soap opera. Focus on Fed decisions and the academics deciding them and you soon lose track of the larger ludicrousness. Why are the livelihoods of literally billions of people perched on a knife's-edge and awaiting Fed decisions regarding a paltry 25 basis point hike?

It took an awful lot of mismanagement to get here. Several ruinous wars and expensive domestic programs have undermined the dollar as the world's reserve currency. The US is a huge debtor nation and even a tiny upwards adjustment in borrowing costs may prove catastrophic.

We have suggested in the past that the Fed has tried to "jawbone" the economy and its most significant participants rather than actually hike. But such a procedure cannot go on forever. Perhaps today is the day it will end.

The system cannot last and in fact is not intended to last. Its unwinding will cause misery and mortality around the world. People are absolutely mesmerized by the modern central banking economy even though it has only been around for about a century – and they ascribe an infallibility to it that it does not have.

After Thoughts

It probably won't last much longer, but the damage has been done. A further, sorry chapter may begin today.

Posted in STAFF NEWS & ANALYSIS
  • Bolt Upright

    Worrying about terrorists is exactly what the man behind the curtain (Fed) wants.

    *Any country, like the US, that issues the dominant world reserve currency has almost limitless power to finance other countries. It gives the monetary hegemony ‘exorbitant privilege,’ as the French remarked in the 1960s. Because it can print the world currency the US can buy anything it wishes without having to worry about its liabilities. While the Soviet Union collapsed because they had to import food with hard-earned dollars from their oil exports, in the 70s and 80s, the US could start the Korean War and the Vietnam War with freshly printed greenbacks. By ‘obliging’ foreign central banks to keep their monetary reserves in Treasury bonds, the US in fact forced them to finance US military spending abroad, as Michael Hudson explains in his book ‘Super Imperialism’. In this new form of imperialism, the US is able to rule not through its position as world creditor, but as world debtor. America’s weakness as a debtor country has indeed become the foundation of the world’s monetary and financial system. A Chinese market commentator once remarked: ‘World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy … a dollar hegemony that forces the world to export not only goods but also dollar earnings from trade to the US … Everyone accepts dollars because dollars can buy oil.’ Only when dollar-holding nations decide to buy natural resources instead of US treasuries, is the dollar’s reserve currency status in danger. This is exactly the exit strategy China and Russia seems to be playing right now. In recent years, the Russians have sold most of their dollar holdings, while they tripled their gold position. The Chinese have stopped buying extra US Treasuries since 2010 while they have imported and invested in huge amounts of gold. These developments signal the first stages of the US dollar’s decay*.

    Koos Jansen

  • autonomous

    All this yap by the FED and about the FED is just to distract us from what is really going on. “Local” banks pay no interest on savings, but dump severe ‘fees’ on their customers, driving those who seek some return on investment into the deep waters where sharks swim, urged on by inflation’s evaporation of money if they just hold it. Whether in property ownership, stocks, precious metals or (less risky) lottery tickets, investing schemes are all sink-holes into which small investors continue to be eaten alive. All this makes Bobby McFerrin’s “Don’t worry, be happy” seem the wisest philosophy.

  • TG Molitor

    The Fed policies function as if truth were a golden mean between opposing falsehoods.

  • Praetor

    As Yellen announces rate hike, as the little smiley face above, can we not see some tears shade. If she is to be sacrificed, may they do it at the Bohemian Grove, Owl alter. Make it official!!!

  • Bruce C.

    Rising interest rates “hurts” only new borrowers unless one has a variable-rate loan which very few do because rates could only go up for the last 8 years so few businesses and individuals chose to bet on negative rates. In general lenders benefit, which includes savers.

    I don’t have a problem with the Fed raising rates and it would have been a problem if they hadn’t. My problem with the Fed (one of several) is that it interferes with interest rates. The financial markets were already operating at higher rates for months but the Fed’s ZIRP was clogging up the process.

    That’s not to say that the economy (both domestic and global) is actually doing so well but because it’s not. Market rates have been rising because of high-yield bond defaults mainly by energy and commodity companies. Look for more defaults across the board in 2016. That is one reason I say that the dollar is going to start to weaken, contrary to conventional wisdom. I expect a lot of turmoil in the markets to be blamed on the Fed’s action today but that will be misplaced. Much of the real blame was the Fed’s QEs and ZIRP starting in 2008.

    Lastly, it’s always important to remember that the Fed protects the banking system. Low interest rates was crimping their profits. Now the Fed will be paying the banks twice as much because it doubled the “Fed funds rate” – the interest paid to the banks for their reserves “held at the Fed, which is about $2.4 trillion. That’s really all you ever needed to know.

  • Clearly, as the rate rise, so will the interest payments on the government’s startling debt. From virtually nothing to pretty much anything is going to be a big shock! Brace taxpayers – your about to be milked like there is no tomorrow.

    • Bruce C.

      Not true, at least right a way. Existing bond rates remain fixed regardless of prevailing rates. The “price” or “value” of the bonds go down as prevailing rates increase to reflect that but not the interest rate (or “coupon payment”) itself.

      Not until those existing bonds mature, which is when the Treasury will have to return the principle to the bondholder will they have to borrow that money again, but at the higher rates. That’s when debt servicing costs will rise. However, since the bond maturities are spread out ranging from 3-months to thirty years the servicing costs will rise gradually.

      Now, if the Treasury continues to deficit spend – and the House just passed an “infrastructure” spending bill last night that will increase the National debt by about $684 billion – servicing costs will rise due to that unless the Fed buys all those bonds to “monetize” it. The Treasury does not have to pay the Fed interest on government bonds that the Fed owns.

      • Thanks for that. It would be interesting to learn what the existing spread of maturity dates actually are on the bonds that are owned outside of the fed.

  • rahrog

    Is it possible that the folks running the federal reserve system have lied for so long about so many things that they have forgotten they’re lying?

  • Danny B

    WHAT RATE HIKE?

    Roberts, “Prior to today’s Fed announcement, the interbank borrowing
    rate was averaging 0.13% ” ” In other words, there has not been enough
    demand from banks for the available liquidity to push the rate up to
    the 0.25% limit.”

    “However, the fact of the matter is that the available liquidity
    exceeded demand in the old rate range. The purpose of raising interest
    rates is to choke off credit demand, but there was no need to choke off
    credit demand when the demand for credit was only sufficient to keep the
    average rate in the midpoint of the old range. This “rate hike” is a
    fraud. It is only for the idiots in the financial media who have been
    going on about a rate hike forever and the need for the Fed to protect
    its credibility by raising interest rates.”

    http://www.paulcraigroberts.org/2015/12/16/what-does-todays-rate-hike-mean-paul-craig-roberts/

    More, http://www.energeticforum.com/283447-post1154.html

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