The media would like to believe the Fed is doing everything in its power to fight inflation, but its not true.
Yes, the Fed raised rates by 50 basis points in May and, yes, the Fed is trying to sound as hawkish as possible. But these things are designed to dupe the public not to reduce inflation. Let me explain.
The current rate of inflation in the US is 8.6%, a 40-year high.
At its May meeting, the Fed raised its target Fed Funds Rate to 1%. Heres the scoop:
The Federal Reserve recently announced that its raising interest rates by half a percentage point, bumping the federal funds rate to a target range of 0.75-1.00%. (The Spokesman-Review)
Got that? So the Feds rate is still a measly 1%. Thats what the media is trying to hide from you, and thats why you might have to read 9 or 10 articles before you find a journalist who provides you with the actual rate.
Why are they hiding the rate?
Because the rate is 7.6% below the rate of inflation, so it doesnt do a damn thing. Its another public relations travesty dolled-up to look like serious monetary policy. But its a joke, and you can see its a joke.
Think of it like this: If I loaned you $100 at 1% interest but inflation was running at 8% I would lose 7 bucks per year, right?
Right. And thats what the Fed is doing. When interest rates are set below the rate of inflation, then the Fed loses money on every loan. In other words, the Fed is providing a subsidy to the banks for borrowing money. Have you ever heard of anything so ridiculous?
How would you like a deal like that? How would you like it if the Fed paid you interest on your credit card debt? Youd probably like that, right? Butif you were honest with yourselfyoud admit that it was a gift, because thats what it is, a gift. The big banks are getting another handout from Uncle Sugar. Thats the whole deal in a nutshell.
Meanwhile, you and I and the other 300 million serfs, continue to pay a hefty 18% to the banks that are being subsidized by the Federal Reserve. Sound fair?
So, how much would the Fed have to hike rates if it really wanted to do its job? Check out this clip from an article at the Chicago Booth Review:
The usual wisdom says that to reduce inflation, the Fed must raise the nominal interest rate by more than the inflation rate. In that way, the real interest rate rises, cooling the economy.
At a minimum, then, according to the usual wisdom, the interest rate should be above 8.5 percent. Now. The Taylor rule says the interest rate should be 2 percent (the Feds inflation target), plus 1.5 times how much inflation exceeds 2 percent, plus the long-term real rate. That means an interest rate of around 12 percent. Yet the Fed sits, and contemplates at most a percent or two by the end of the year. (Why Hasnt the Fed Done More to Fight Inflation Chicago Booth Review)
So if the Fed was serious about fighting inflation, they would have raised rates to roughly 12%. Instead, they have decided to use their allies in the media to pull the wool over everyones eyes. Thats whats going on. Its another big snow-job. Heres more from the Chicago Booth Review:
the inflationary shock we just experienced, whatever its source, together with todays low interest rate, gives us a large negative real interest rate. That negative rate is itself additional stimulus: it raises output and lowers unemployment. Higher output and lower unemployment, however, raise inflation even more, relative to the large past inflation. Higher inflation means an even lower real interest rate, and more inflation still, in a never-ending spiraluntil the Fed gives in, raises interest rates to much above inflation, and contains the mess with a large recession. (Why Hasnt the Fed Done More to Fight Inflation Chicago Booth Review)
So, when the Feds rate is lower than the rate of inflation, then inflation rises, the opposite of what we want to achieve.
Bottom line: Ultra-loose monetary policy fuels inflation and creates gigantic economy-destroying asset bubbles that wipe out trillions and ruin lives. Sound familiar?
It should. Weve been through this drill many times before.
Heres something else you should know: The Fed has had its foot on the gas since Lehman Brothers blew up in 2008. Thats when Fed Chair Ben Bernanke dropped rates to zero and put the printing press on full throttle. From that point on, the Fed has been flooding the zone with low-price liquidity that has inflated the biggest asset-price bubble of all time.
Why does everyone need to know this?
Because inflationary pressures are forcing the Fed to raise rates, but even the slightest rate-hike can touch-off firesales that impact other shadow lenders that are equally overextended triggering a daisy-chain of defaults that can domino through the system causing another financial crisis. In other words, the asset-price bubble the Fed has created with its low-rate mania is so gargantuan and unstable, that any tightening of policy can ignite a system-wide meltdown. Thats why Powell is so skittish about raising rates. Its because he doesnt know who the weak players are and where they are hiding. If one giant investment bank that is drowning in red ink suddenly goes belly-up after interest rates rise, then that bank is going to take down 20-or-so counterparties along with him. Thats the problem with todays grossly-entangled market; the web of debt stretches across the entire system endangering even the stronger players. The last thing Powell wants to do is prick the bubble the Fed has been inflating for the last 14 years.
Did you know the Fed has purchased $9 trillion in mostly US Treasuries and Mortgage-Backed Securities since 2008?
What that means is that stock and bond prices have risen not on their growth-potential or due to basic supply-demand dynamics, but because the Fed has been actively distorting market prices to enrich its investor friends. This is how wealth is transferred to other members of the investor class, not in great bags filled with money, but through the underpricing of credit that is further amplified through dodgy debt instruments. Thats the name of the game.
Recently, the Fed has indicated that it wants to reduce its balance sheet to a more manageable size. The problem is that just as stock prices rose when the Fed purchased USTs so too, they will fall sharply when the Fed sells. And, that is precisely what has happened everytime the Fed has tried to shrink its balance sheet; stocks have fallen off a cliff. So, while the Fed has succeeded in pushing stock prices higher, (by purchasing $9 trillion in financial assets), it will not succeed in keeping stocks high while rolling off its prodigious asset-pile. In other words, the Fed will not be able to repeal the laws of physics.
Do you remember The stock market crash of 2020? Do you remember how it ended? Heres a little background from an article at The Balance:
The stock market crash of 2020 began on Monday, March 9, with historys most significant point plunge for the Dow Jones Industrial Average (DJIA) up to that date. Two more record-setting point drops followed it on March 12 and March 16.
The stock market crash included the three worst point drops in U.S. history. The drop was caused by unbridled global fears about the spread of the coronavirus, oil price drops, and the possibility of a 2020 recession.
Although the 2020 market crash was dramatic, it didnt last. The stock market experienced a surprising recovery, even as many areas of the U.S. economy continued to experience trouble
(How Does the 2020 Stock Market Crash Compare With Others?, The Balance)
So, stocks plunged thousands of points in response to a fast-spreading pandemic that was shuddering businesses and decimating economies around the world. The media dismissed the sell-off as a panic but that cretainly wasnt the case. Investors rationally concluded that economic activity was going to be gravely impacted by the virus and simply sold while they could. With no sign of a remedy or vaccine, there was no reason for optimism.
But why did the sell-off stop? Thats what we want to know. What caused investors to rethink their approach and dive back into the market headfirst?
The Fed stopped the selloff. And the announcement that stopped the bleeding was probably the most extraordinary event in the Central Banks long and checkered history. Because, in essence, what Fed chairman Powell said was that he would put a bottom under stock and bond prices to prevent them from falling too far. Think about that. Here we had the Fed who poses as an impartial regulator of market activity telling us to our faces that he plans to intervene whenever he thinks prices do not align with his expectations? In other words, the Fed promised to prevent the market from functioning according to normal supply-demand dynamics. The free market had to be sacrificed in order to prevent the inevitable losses from the pandemic. Naturally, investors loved hearing that the Fed had their back and stampeded back into the market money-in-hand.
And how did the Feds announcement impact the market?
Lets look at the Dow Jones Industrial Average during that period.
On March 16, 2020, the Dow ended the session posting a close of 20,188.
Two years later on Jan 4, 2022, the index closed at 36,799.
In other words, the Feds promise to support stock prices triggered a 16 thousand point rise in the Dow in the middle of a pandemic.
Would you call that manipulation?
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