‘The Fed has a HUGE
problem on its hands.
Fed officials are
well aware that stocks have become totally disconnected from reality. However,
they cannot simply come out and discuss ending stimulus efforts outright
because it would cause a market collapse. Remember, the single most important
role for the Fed post-2008 is to maintain confidence in the system. So they
cannot risk any explicit statement that they will be pulling the punchbowl.
Consequently, Fed
officials have begun a careful process of managing down expectations regarding
future stimulus.
Federal Reserve
Bank of St. Louis President James Bullard gave remarks Thursday on “U.S.
Monetary Policy: Easier Than You Think It Is,” at a special banking forum
sponsored by Mississippi State University’s Department of Finance and
Economics.
Bullard
discussed four considerations for QE3 going forward. First, while
substantial labor market improvement is a condition for ending the program,
Bullard said that “the Committee could consider many different aspects of labor
market performance when evaluating whether there has been ‘substantial
improvement.’” These include the unemployment rate, employment, hours
worked, and Job Openings and Labor Turnover Survey (JOLTS) data.
Second, “Without an end date, the Committee
may have to alter the pace of purchases as news arrives concerning U.S.
macroeconomic performance,” Bullard said, noting that “substantial labor
market improvement” does not arrive suddenly. “This suggests that as labor
markets improve somewhat, the pace of asset purchases could be reduced
somewhat, but not ended altogether,” he explained. “This
type of policy would send important signals to the private sector concerning
the Committee’s judgment on the amount of progress made to that point.”
A third consideration
for the QE program is inflation and inflation expectations, Bullard said.
Current readings on inflation are rather low, which he said may give the FOMC
some leeway to continue asset purchases for longer than otherwise.
Although worries about rising inflation have so far been unfounded, “the lesson from QE2 is that
inflation and inflation expectations did trend higher,” he said, adding that it
is too early to know if that will happen with the current QE program.
Finally, he
said, “The size of the balance sheet could inhibit the Committee’s ability to
exit appropriately from the current very expansive monetary policy.” He
explained that when interest rates rise, asset values will fall, which could
possibly complicate monetary policy decisions.
http://www.stlouisfed.org/newsroom/displayNews.cfm?article=1669
Note that Bullard,
like the December Fed FOMC, mentions “inflation expectations.” The Fed cannot
ever openly admit that inflation is a problem because doing so would inevitably
lead to the realization that the Fed is in fact the primary cause of inflation
in the financial system.
Consequently the Fed
must use coded terms such as “inflation expectations” to discuss the presence
of inflation (note that “inflation expectations” moves the blame for prices to
investors who expect inflation as opposed to the Fed which has created
inflation).
The fact that this
phrase (inflation expectations) pops up in both Bullard’s speech and the Fed’s
FOMC minutes indicates that the Fed is well aware that it is causing inflation
to spiral out of control. This is a big reason why the Fed is beginning to
manage down expectations of future stimulus.
Indeed, Bullard is
not the only Fed official to be talking down QE.
Federal Reserve
Bank of Cleveland President Sandra Pianalto said the gains from the Fed’s $85
billion in monthly bond purchase may fade.
“Over time, the benefits of our
asset purchases may be diminishing,” Pianalto said today in a
speech at Florida Gulf Coast University in Fort Myers, Florida.
“Given how low
interest rates currently are, it is possible that future asset purchases will
not ease financial conditions by as much as they have in the past,” she said. “It is also possible that easier
financial conditions, to the extent they do occur, may not provide the same
boost to the economy as they have in the past.”
Fed officials
are debating how long they should continue their bond buying, designed to
foster economic growth and reduce 7.9 percent unemployment. The Federal Open
Market Committee last month kept the monthly purchase pace unchanged at $40
billion in mortgage-backed securities and $45 billion in Treasury purchases.
The central bank
has said the purchases will continue until the labor market improves
“substantially.”
Inflation is on the
rise in the financial system in a big way thanks to the Fed and other Central
Banks’ money printing. However, the Fed has now realized that things are
beginning to spiral out of control. As a result it is managing down
expectations for further stimulus. This will not contain inflation in any
real way. However, it will have a major impact on asset prices,
particularly stocks which are now in a bubble, closing in on all-time highs
despite earnings falling, the global economy rolling over, a banking crisis in
Europe, a sovereign debt crisis in Europe, China slowing its liquidity
injections and more.
This will end very
badly. The Fed has set the stage for another Crash. And this time around its
hands will be tied as it has used up all of its tools just creating this
bubble.
THIS is the reason the Fed is
beginning to shift its tone. It realizes it has blown another bubble and that
we’re likely headed for another Crash. And this time around the Fed will be
totally out of ammo to stop it. Unlike 2008 which was just a warm-up, this will
be the REAL CRISIS featuring full-scale systemic failure.
So if you have not
already taken steps to prepare for systemic failure, you NEED to do so NOW.
We’re literally at most a few months, and very likely just a few weeks from the
economy taking a massive downturn, potentially taking down the financial system
with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars
into financial system right now trying to stop this from happening.
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Best Regards,
Graham Summers