Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

The Fed Is Working From a Position of Fear

  by    0   0

The stock market keeps hitting new highs and employment reports continue to look good. President Trump and central bankers at the Fed like to point to this and tell us that the economy is doing good. But as Peter Schiff explained in his latest podcast, the markets aren’t making highs because the economy is good. It’s making highs because of the Federal Reserve’s easy-money policies.

Despite the fact that the economic data is deteriorating. Despite the fact that corporate earnings are falling, it is the Fed that is pushing this market to new highs by cutting interest rates, by indicating to the markets that they don’t have to worry about rate hikes no matter what happens with inflation. The Fed’s not going to raise interest rates. Oh, and by the way, they’re doing quantitative easing, and they’re going to print as much money as they have to keep the markets going up and to keep the economy propped up.”

In a recent article published at the Mises Wire, Ryan McMaken adds another layer of analysis. He says that despite the Fed’s positive rhetoric, it’s actually worried about liquidity and growth. In fact, McMaken believes it is operating from a position of fear.

The Federal Reserve lowered its benchmark interest rate on Wednesday, cutting the target federal funds rate by 0.25 percent to a range of 0.5 to 0.75 percent.

The Fed’s rate-setting committee, the FOMC, has now cut rates three times this year. The committee’s rhetoric around the rate cut was the usual routine. The committee’s statement indicated that “the labor market remains strong and that economic activity has been rising at a moderate rate.” But the official statement says something similar nearly every time the committee meets. So, there is no information here to suggests why the committee is cutting now versus all the other times the labor market is “strong” and economic strength is “moderate.”

Two members of the committee voted against the cut: Esther L. George and Eric S. Rosengren.

Rosengren voted against the measure because he wanted a bigger rate cut. George, like her predecessor Thomas Hoenig at the Kansas City Fed, is relatively hawkish — although not the extent Hoenig was.

Thus, George noted in response to the rate cut: “While weakness in manufacturing and business investment is evident, it is not clear that monetary policy is the appropriate tool to offset the risks faced by businesses in those sectors when weighed against the costs that could be associated with such action.”

In other words, George recognizes that, yes, there are downsides to expansionary monetary policy.

Although the Fed statements offer no insights, the fact the Fed continues to cut rates suggests it is working from a position of fear about the true strength of the economy. Although jobs data continues to point to expansion, a number of other indicators look less rosy. The Case-Shiller index, for example, has fallen to 2-percent growth and appears to be headed toward zero. We have seen a similar dynamic since 2006. Moreover, new housing permit growth has been negative (year-over-year) in six of the last ten months. Tax receipt data has also been weak, with seven out of the last ten reported periods showing negative year-over-year growth.

It’s true that other indicators point to strength, but if things are going so well, why cut rates?

After all, the target rate is already remarkably low even by the standards of the most recent expansion, when the Fed Funds rate was allowed to rise to over five percent.

The Fed has justified this ultra-low-rate policy with theories about the natural interest rate, and about the alleged need to keep prices at or above two-percent inflation.

The problem is that the Fed cannot actually observe the natural interest rate and the two-percent inflation standard is a completely arbitrary standard invented in recent years.

Nonetheless, the Fed continues to look relatively restrained compared to other central banks, to which its policies are in part a reaction. Other central banks have set a very low bar, to be sure, but the Fred nonetheless looks almost hawkish compared to the ECB and the Bank of Japan. Both are pursuing a negative-interest-rate policy, and even with the latest rate cut, the Fed’s target rate also remains above that of the Bank of England, and equal with the Bank of Canada.

But the target rate is, of course, not the Fed’s only policy tool. To address liquidity problems observed during the recent repo crisis, the Fed has stepped up purchases and added to its balance sheet.

And then there is the interest the Fed pays on reserves. On Wednesday, the FOMC also announced a cut to the interest rate “paid on required and excess reserve balances,” dropping the rate from 1.8 percent to 1.55 %, mirroring the drop in the fed funds rate.

This keeps the interest paid on reserves at 0.2% below the fed funds rate. That’s the biggest gap we’ve seen since 2008, and it suggests the Fed wants more lending in the real economy, even though it’s also apparently concerned about liquidity for banks.

This makes sense if we’re in a late phase of the boom which brings increased demand for loans, but without sufficient savings and earnings at the street level to assure liquidity for banks through the marketplace. This is only a problem one encounters in an economy built on central-bank credit expansion. Central bankers no doubt are sure they can navigate these waters, but its unclear how long they can keep the current boom going.

WhyBuyGoldNowBanner.070815.590

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Related Posts

Bailout Nation: Moral Hazard and Low Economic Growth

Bailouts are the name of the game right now. It seems like everybody is in line for a bailout. Airlines. Movie theaters. Small businesses. Hospitals. Not to mention the fact that the Federal Reserve has resorted to directly buying corporate debt. Conventional wisdom tells us this is necessary. After all, the government shutdown put tremendous […]

READ MORE →

Coronavirus Put the “War on Cash” Into Hyperdrive

Last month we reported that the Chinese government has launched a pilot program for a digital version of the yuan. The virtual currency ups the ante in the war on cash and creates the potential for the government to track and even control consumer spending. China isn’t alone in using COVID-19 as an excuse to […]

READ MORE →

Ron Paul: The Fed Is Getting Desperate

Peter Schiff has called the Federal Reserve’s response to the economic “a monetary hail mary.” The central bank has printed trillions of dollars out of thin air through QE infinity, taking the Great Recession quantitative easing programs and putting them on steroids. And the Fed has gone beyond the “standard” extraordinary policy of the 2008 […]

READ MORE →

(Un)Happy Deficit Day

On June 9, the national debt surged above $26 trillion. Just over one month before that, the debt eclipsed $25 trillion. And 28 days before that, the national debt stood at a mere $24 million. May’s budget shortfall came in at a staggering $398.8 billion, pushing the fiscal 2020 deficit to $1.88 trillion And there […]

READ MORE →

The Fed Gone Wild

Peter Schiff has called it a “monetary Hail Mary,” but virtually nobody in the mainstream questions the wisdom of the Federal Reserve unprecedented response to the economic impacts of the coronavirus pandemic. And it truly is unprecedented. It’s not just zero percent interest rates and QE infinity. The Fed is buying everything but the kitchen […]

READ MORE →

Comments are closed.

Call Now