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The Fed’s Open Mouth Operations

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On Tuesday, Federal Reserve Chairman Jerome Powell testified before the Senate Committee on Banking, Housing, and Urban Affairs. It was classic Fed “open mouth operations” as Powell tried to talk up the central bank’s policies and assure everybody that everything is under control. But is it, really?

Peter Schiff hit some of the highlights of Powell’s testimony during his podcast.

Earlier this week, the Federal Reserve announced that it would begin buying individual corporate bonds.


The stock market is way up. The unemployment situation is better than expected. (At least that’s the mainstream view.) There are signs that the economy is rebounding from the government shutdowns. Why is the Fed still upping the ante on its monetary stimulus?

Powell gave us a hint. He insisted the central bank is not “an elephant running through the bond market” but said they felt they had to “follow through” and buy bonds because the plan was announced in March.

In the first place, as Peter points out, when Powell claims the bond-buying program isn’t really impacting the market, he’s blowing smoke. The whole point of the program is to impact the market.

Well, if the Fed wasn’t having an impact on the market, then why do it? The purpose of this program is to impact the market. Otherwise, the Fed would not be doing it, if it had no impact.”

As far as feeling obligated to follow through on its promise to buy corporate bonds, Peter asks the poignant question – why?

It really shows you that the Fed is beholden to Wall Street speculators. Those are the ones who are counting on the Fed buying those bonds. Because they already bought those bonds. They front-ran the trade. As soon as the Fed announced its intention to buy corporate bonds, what did speculators do? They ran into the market and bought up corporate bonds and bid up their prices. So, now you have a bunch of overpriced corporate bonds. And how do these speculators get out? They sell to the Fed. That’s the reason they bought — so they could sell to the Fed. And now the Fed is coming forward and saying, ‘Well, even though the prices have gone way up, they’re not way down where they were when we said we were coming to the rescue, even though we’ve had this recovery in the markets, we’re going to buy them anyway because we made a commitment.’ So, what they’re saying is they want to honor their commitment to the speculators. They want to make sure the people who followed the Fed’s advice get rewarded.”

The central bankers know they need those speculators 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.”

This reveals what the Fed’s monetary policy is really all about. It’s not about the economy. It’s about propping up Wall Street.

Powell also said he’s not concerned about inflation because the Federal Reserve knows what to do if inflation becomes a problem. But as Peter said, knowing what to do and doing what you know are two different things.

Yes, the Fed knows what to do. Raise interest rates sharply and shrink your balance sheet, right? Contract the money supply. Sell Treasuries. Sell corporate bonds. Take money out of the economy and sell the assets you bought to expand the money supply and jack up interest rates. Is the Fed going to do that?  Not a chance! What would happen if the Fed did that? The economy would crash like it’s never crashed before. So, the Fed knows how to fight inflation. It just knows that it can’t fight inflation with what it knows. Because it also knows what it will do to the bubble that it inflated.”

We have said the Fed doesn’t have an exit strategy. Powell so much as admitted this when Sen. Robert Kennedy asked how the central bank plans to shrink its balance sheet to a level that isn’t “other-worldly.” In fact, the chairman actually laughed at the question and then talked about “the peaceful period” from 2014-2017 when the Fed just froze the size of the balance sheet, letting the economy grow into it.

His entire plan to shrink the balance sheet is to stop growing the balance sheet and hope the economy continues to grow so that whatever the balance sheet is when he stops expanding it, it becomes a smaller percentage of the economy. Basically, he’s saying the balance sheet is never going to shrink in actual terms. It’s never going to go down.”

Keep in mind, when the Fed started trying to normalize after the ’08 crisis, the markets went into convulsions.

Powell is really admitting again, as if people didn’t know by now, I mean, how many times do you got to be hit on the head, that this is QE infinity, that the Fed’s balance sheet is never going to shrink.”

It was the anticipation of normalization that caused the dollar to bounce back and gold to sell off after the 2008 crisis.

That whole bubble, that whole recovery was predicated on the ability of the Fed to shrink its balance sheet and normalize interest rates. Well, now that everybody should know, because the Fed has told them that neither of those things are ever going to happen, the bottoms got to fall out of the dollar and gold’s going to go through the roof, and this whole house of cards is going to come tumbling down.”


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