Former Fed Governor: Fed Is Not Data Dependent; It Is Propping Up Asset Markets (Video)

Earlier this year, Peter Schiff picked up on something few reported on when a former Federal Reserve president admitted the central bank created a phony wealth effect by pumping up stocks and other asset markets through its monetary policy. Several months later, analysis proved this was true, showing that 93% of the entire stock market move since 2008 was caused by Federal Reserve policy.

Today, the Fed continues to focus on propping up asset markets. Even a former Federal Reserve governor admits this is the case. Kevin Warsh appeared CNBC’s Squawk Box on Thursday and said the Fed isn’t really “data dependent” in the sense that it is looking at the overall economy. It is really market dependent.

They look to me asset price dependent more than they look data dependent. When the stock market falls like it did in the beginning of this year, they say, ‘Oh, we better not do anything.’ Stock markets are now at career highs. I suspect when they meet over the course of the next 10 days they will suggest, ‘Oh, now they look like they can be somewhat more responsible.’ I don’t like changing policy meeting to meeting based on data, or even with what the S&P 500 is doing. I like making it based on what’s happening on the real side of the economy, and that has not been very convenient over the last six to nine months.”

Warsh went on to make another point that Peter has been harping on for months – the US economy isn’t in very good shape, and the Fed simply can’t raise rates.

The bad news is the real side of the economy in the US has deteriorated since September; quarterly earnings will now be down six quarters in a row. That’s the first time that’s happened outside of a recession. The Fed had a long window to tighten policy, to raise rates – 2013, 2014, 2015, and it strikes me they missed that wide-open window.”

Warsh’s comments lend credibility to a prediction Peter made on CNBC last month: the Fed will ultimately sacrifice the dollar on the altar of the stock market leading to a full-blown currency crisis.

Highlights from the interview:

“I must say I find their decision making in the last six or seven months puzzling…It is not obvious what their strategy is. I know…they say they’re data-dependent. I don’t know exactly what that means.”

“They look to me asset price dependent more than they look data dependent. When the stock market falls like it did in the beginning of this year they say, ‘Oh, we better not do anything.’ Stock markets are now at career highs. I suspect when they meet over the course of the next 10 days they will suggest, ‘Oh now they look like they can be somewhat more responsible.’ I don’t like changing policy meeting to meeting based on data, or even with what the S&P 500 is doing. I like making it based on what’s happening on the real side of the economy, and that has not been very convenient over the last six to nine months.”

“In the darkest days of the crisis, when markets were falling, I have to admit getting asset prices up, trying to get markets up…nothing wrong with that. We’re supposed to respond to financial crises. That was seven and eight years ago. This preoccupation with your show, and with the Bloomberg screen, and with stock prices…that is not the right worldview for central bankers at a time like this.”

“The bad news is the real side of the economy in the US has deteriorated since September; quarterly earnings will now be down six quarters in a row. That’s the first time that’s happened outside of a recession. The Fed had a long window to tighten policy, to raise rates – 2013, 2014, 2015, and it strikes me they missed that wide-open window.”

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“I wouldn’t have raised rates in December. I find it odd that you had a window of two-and-a-half, three years with the supply side of the economy doing better, corporate revenues increasing, profits increasing, an economy that wasn’t great, but at least going in the right direction. I would have been much more worried in December than they.”

“Why is it that they [the Fed] are so worried about touching the balance sheet? Because they think that is what’s keeping asset prices up.”

“I would say the Fed’s policies have been running against capital investment, discouraging real investment in property, plant, and equipment, and software for several years.”

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