Fed Ponders How to Temper Tapering Without Rate Increase … One of Janet Yellen's first challenges as Federal Reserve chairman will be figuring out how to cushion against a lurch in interest rates when she pares the pace of the central bank's bond buying. – Bloomberg
Dominant Social Theme: The Fed struggles with problems. Nonetheless, these are wise individuals, indeed.
Free-Market Analysis: Bloomberg wants us to believe that life must always be like this … a kind of spectator sport in which our betters make decisions about our prosperity and even our survival.
Of course, the US economy has been failing for years so perhaps there is not that much to talk about. What our central banking betters WILL want to discuss is how to damp price inflation while continuing some sort of easing.
Why? Because it is probably not possible to halt the monetary fueling at the moment without suffering a great deal of economic pain and very possibly another recession/depression.
We think we know what the outcome will be. The aim of this exercise will be to focus as much money as possible on bank bottom lines and circulate as little as possible elsewhere.
Of course, this may force securities markets much higher, as well, which will be an inconvenient but tolerable side effect. We've called this secondary evolution a "Wall Street Party."
Here's more from the article, calmly analyzing Fed options:
After sending 10-year Treasury yields more than a percentage point higher by fueling taper expectations in May and June, policy makers now are grappling with their options when they do reduce debt purchases that have swelled their balance sheet to a record $3.91 trillion.
The Fed's failure so far to convince investors that tapering on its own doesn't constitute a tightening of policy creates the risk of more market volatility as the central bank communicates about tools it's never used.
… Since lowering their benchmark interest rate to near zero in December 2008, Fed officials have relied on bond buying and forward guidance about their plans to try to spur growth. They've suggested pushing back the timeline for rate increases, emphasizing they won't raise borrowing costs until inflation climbs, or lowering the interest they pay on the cash that banks park at the central bank as ways to add stimulus.
"It's been a struggle," said Ward McCarthy, chief financial economist at Jefferies LLC in New York. "With the shift to balance-sheet policy, there's not a whole lot to fall back on — both in terms of making decisions on how to conduct balance-sheet policy and how to communicate it. It's a new experience both in and out of the Fed."
Yellen, who is currently vice chairman, told the senators that central bankers "certainly want to diminish any unnecessary volatility" and are "trying as hard as we can to communicate clearly." The Fed is buying $85 billion of mortgage-backed securities and Treasuries each month. It will slow these purchases in March, according to the median estimate of 32 economists in a Bloomberg News survey conducted Nov. 8.
McCarthy predicts the Fed will try to push back expectations for an interest-rate increase to 2016 — though he's not sure how. He also said the Fed may cut purchases of short-term debt and maintain the pace of buying longer-term securities in an effort to anchor borrowing costs.
… Yellen is committed to promoting strong growth and won't remove stimulus too soon, even as the Fed's bond buying comes to a close, she said Nov. 14. "The message we want to send is that we will do what is in our power to assure a robust recovery in the context of price stability."
We can see in these comments from Ward McCarthy that the Fed is contemplating exactly what we are expecting. Those who defend the Fed by saying it only has authority over short-term rates can stop making these arguments, as McCarthy believes the Fed will soon focus mostly on longer-term instruments.
But there are other possibilities. The Fed could expand the rate of return that it is currently paying to banks, which would have a further retardant effect on lending.
The Fed and the Treasury could work out an arrangement somehow to ship yet more currency overseas so that it does not circulate in the US and expand the active money supply, which would aggravate price inflation.
Finally, the top men running the economy could simply expand the current program of disinformation by continuing to announce lower levels of price inflation even when prices are apparently moving up far faster than official figures acknowledge.
Bottom line: We don't see how tapering is an option at this point. Ben Bernanke and Yellen were said to have been surprised by the violent reaction of the markets when they tried and the withdrawal of the strategy speaks volumes.
Of course, being cynical types, we're not even sure we believe reports of "surprise" from Fed mavens. True, Yellen comes across as some sort of psycho cult member, brainwashed and delusional, but we have a hard time believing she and the others are so entirely oblivious to what they do.
At some level, they must be aware that the institution they are part of is in the final stages of destroying the US economy and that, indeed, they may be in a position to deal the final blow.
As this is surely an uncomfortable truth to verbalize, we expect an ever more emphatic stream of double-talk and market manipulations as the final acts of this tragedy play out.
First, a Wall Street Party and then … the ruinous aftermath. And throughout this scenario, the constant, delusional drip of increasingly unmoored statements about the Fed's competence and the government's efficiency generally.
Somehow the eventual unwinding of these trillions shall be blamed on the private markets and as everything crashes down, those at the top will suggest a new and even more globalized system using the strategies that have created such domestic havoc.
Thus the New Era is created, a bastardized progeny of monetary dissembling and the malicious manipulation of the instrumentalities of money – both rates and volume.
This is what Yellen will surely preside over, at least in part. To want the job, she must be delusional, which is no doubt a primary reason she is likely receiving it.