Fed Signals "All Systems Go" for More Inflation
by
Mike Larson
I
have been adamant recently in saying that the Federal
Reserve would not ... would NOT ... signal an end to the
easy money environment at this week's policy meeting.
These guys simply lack the political willpower and the
inclination to do what's right. They want to keep the
booze flowing to inflate assets, the long-term
consequences be darned.
Sure
enough, the Fed reiterated Wednesday that it's not worried
at all about the surge in asset or commodity prices. It
said,
"Substantial resource slack [is] likely to continue to
dampen cost pressures and with longer-term inflation
expectations stable, the Committee expects that
inflation will remain subdued for some time."
Not
only that, the Fed also said it will keep rates low until
the cows come home. Specifically, it said that it ...
"
... continues to anticipate that economic conditions,
including low rates of resource utilization, subdued
inflation trends, and stable inflation expectations, are
likely to warrant exceptionally low levels of the
federal funds rate for an extended period."
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The FOMC isn't worried about inflation. |
The
only change the Fed did signal? That it'll buy up to $175
billion in so-called "agency" debt, slightly below its
previous target of $200 billion. But it's still going to
buy $1.25 trillion in mortgage-backed securities.
And
it's not buying fewer bonds issued by Fannie Mae and
Freddie Mac because it suddenly realized the folly of
"monetizing" U.S. debt obligations ...
...
it's because of the "limited availability of agency debt"
to buy. In other words, the Fed is afraid it's cornering
and distorting the market ... which it is!
Never Forget: "Proactive" Is A
Dirty Word in Washington
Why
have I been saying you should forget the empty talk you're
hearing about tighter policy? Because action is what
counts. And it is abundantly clear to me that
the Fed won't take action until it's forced to
by a dollar crash, a bond market collapse, or
some combination of both.
Those events would be important signals that the market
has lost confidence in the Fed's ability to control
inflation and in the U.S. government's willingness to
preserve the value of the dollar, necessitating a policy
response.
"Proactive" is quite simply a dirty word in Washington.
Politicians (and this includes Fed members, no matter how
much they like to pretend they're not political creatures)
don't like to move before a crisis ... only
after one gives them the political cover to do so.
Indeed, history is clear: Rather than proactively tighten
monetary policy in the late-1990s to quell the insane
speculation in tech stocks, the Fed ignored the bubble
until it gutted the portfolios of millions of investors.
Then the Fed ignored the 2003-2006 housing bubble until it
ruined the lives of millions of homeowners.
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The Fed just told the markets to let the good
times roll! |
Now,
the Fed is doing the same thing again, but on an
even grander scale. It's inflating virtually every asset
under the sun — junk bonds, corporate bonds, gold,
commodities, stocks, you name it. And rather than
proactively taking steps to control the markets ... before
they get OUT of control ... they just told the market this
week to let the good times roll!
Regulators, Congress looked the other way while
Fannie, Freddie, and mega-banks drove themselves off a
cliff!
It's
not just Fed policymakers. It's the banking regulators and
Congress, too!
Look
at Fannie Mae and Freddie Mac. People were warning for
years that they were taking on too much risk ... that they
were too thinly capitalized ... and that a housing crash
would bury them.
But
Washington allowed the two agencies to go on their merry
way, piling up huge amounts of debt and risk. We all know
what happened then: They blew up, requiring tens of
billions of dollars in taxpayer-funded bailout money.
Ditto for the banks that were making reckless, high-risk
home equity loans, mortgages, and commercial real estate
loans. Many observers, including us, were shouting from
the rooftops that this would end in disaster.
But
rather than shut down the lenders making these loans, or
FORCE them to cut back on their risky lending, all the
regulators did was issue mealy-mouthed "guidance" letters.
The banks ignored them because they had no teeth. And not
too long after, those banks began to fall like dominoes.
Bottom line: I don't LIKE the Fed's current policy of
asset inflation. I know it's going to end in tears. But
until those events I mentioned earlier (currency crash,
bond crash, etc.) occur, forcing a change in policy and
leading to a shift in momentum, the only thing we can do
as individual investors is play along and try to make as
much money as possible.
Until next time,
Mike
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