Fed Minutes Show No Sign of Backing Off Monetary Hail Mary
Don’t expect the Federal Reserve to pull back on its monetary Hail Mary anytime soon.
The central bank released the minutes from the June meeting yesterday. There were no big surprises, but they did reaffirm the Fed’s commitment to continuing its unprecedented monetary policy into the foreseeable future.
And it truly is unprecedented. It’s not just zero percent interest rates and QE infinity. The Fed is buying everything but the kitchen sink. It’s now even become a player in the corporate bond market.
According to the Fed minutes, the current unprecedented trajectory “remains appropriate.” The minutes noted a need for “highly accommodative monetary policy for some time.”
The minutes emphasized that the central bankers aren’t particularly optimistic about a fast recovery.
Participants commented that there remained an extraordinary amount of uncertainty and considerable risks to the economic outlook.”
The FOMC also expressed concern that the trillions in fiscal stimulus flowing out of Washington D.C. might be “insufficient.”
It’s not surprising the Fed would like to see more government stimulus. You have to wonder what else the Fed can do to keep the air in the bubbles. There remains the possibility of taking interest rates negative, but Powell has expressed reluctance to go that route.
There is also talk of yield curve control (YCC). This policy would involve moves to cap interest rates at certain points along the yield curve. In effect, the Fed would micromanage interest rates by targeting bond purchases at specific maturities.
The typical QE program targets relatively short-term bonds. Under a yield curve control program, the Fed would buy bonds with longer maturities in an attempt to keep those rates from rising above certain levels. Traditional QE focuses on the number of bonds purchased. YCC is, in effect, an artificial price control. As the Brookings Institute explains, “Under YCC, the central bank commits to buy whatever amount of bonds the market wants to supply at its target price. Once bond markets internalize the central bank’s commitment, the target price becomes the market price—who would be willing to sell the bond to a private investor for less than they could get by selling to the Fed?”
The Fed seems more inclined to consider YCC than negative rates, but it still seems reticent to make such a move. Instead, the minutes indicate that the central bankers hope stronger “forward guidance” will maintain the effectiveness of their current policy.
In particular, most participants commented that the Committee should communicate a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding purchases of Treasury securities and agency [mortgage-backed securities] as more information about the trajectory of the economy becomes available.”
By forward guidance, the Fed means open mouth operations.
In other words, the Fed is going to keep talking about how it is committed, as Powell put it after the last FOMC meeting, “to do whatever we can, for as long as it takes.”
Another example of open mouth operations was Powell’s assurance that “we’re not even thinking about thinking about raising rates.”
But the truth of the matter is that talk only goes so far. The Fed has to be willing to act. This is precisely why the central bank moved forward with corporate bond purchases. Powell said they felt they had to follow through with the program since they promised it in March. They wanted to make sure people understood they would back up the talk. As Peter Schiff said at the time, the central bankers know they need speculators to act on their rhetoric so they can talk up the markets.
It wants speculators to know that when the Fed says something, it means something, so its ‘open mouth operations’ actually have teeth. Because if the Fed didn’t follow through, then the next time they cried wolf, nobody would come running and buy those bonds.”
Powell and Company have made it clear they will do whatever it takes to keep the air in the stock market bubble. They’ve fired an awful lot of bullets and isn’t a whole lot of ammo left in the armory. That’s the reason behind the open mouth operations. They need to keep things limping along and try to keep why little powder they have left dry.
As Peter said after the June meeting, the Fed is desperate.
They know that everything is going to fall apart. So, they just got interest rates at zero and they don’t care what happens. It’s like they got their pedal to the metal, and they’re going full-speed ahead, and they just closed their eyes. They don’t even care what’s on the road because it doesn’t matter. Even if they go over a cliff and crash and burn, it doesn’t matter because they’re going to die anyway. I mean, that’s basically what they’re saying.”