Fed Chair Janet Yellen did a superb job on Wednesday. Just about everything went up, and the S&P 500 hit another record high. Oh wait, the dollar didn’t. It ticked down to the rhythm of her words as they pealed through the universe. That too is in the Fed’s master plan; the gradual, consistent, ceaseless destruction of the dollar – and she is just the current mouthpiece.
So the FOMC announced that it would taper its money-printing binge to $35 billion in July and that the Fed Funds rate might be closer to 1.25%, not by tomorrow, but by the end of next year. This represents some sort of imaginary tightening – imaginary, because in my book, 1.25% a year and a half from now still falls under ZIRP, especially with inflation already over 2%.
Financial repression will remain the law of the land for the foreseeable future, Yellen confirmed once again. And the just announced spurt in inflation, someone asked her? Well, inflation data is “noisy,” she said, so it’s going to be ignored for a while in order to bring down real wages even further; that’s good for the profitability of the Fed’s elite club; every corporation wants cheap labor. Though it has a nefarious impact on the overall economy.
The Fed also did its favorite thing, which it does every time it meets, and without which it apparently cannot even meet: it lowered the growth forecast for quarters that are moving closer to reality. So now the range is 2.1% to 2.3% for 2014. In 2012, so nearly $2 trillion of QE ago, the Fed still thought that escape velocity would propel the economy forward by nearly 4% this year.
And the VIX volatility index was further lulled to sleep. At 10.61, it set a new low for the year. The only other time over the last few decades it was this low was in January 2007, as the housing market was already toppling – “plateauing,” it was called then – and all heck was already breaking lose beneath the surface at banks and other worthy members of the Fed’s elite soon-to-be-bailed-out Wall Street club. This extremely low level means that the market isn’t prepared for a major downward move, which can create a hair-raising environment when it does come. The phenomenon is called complacency.
Central bankers in the US and around the world have been fretting for months about complacency. Not Yellen. It barely registered on her scale. She pointed out that “the Fed has no target for the right level of volatility.” She did have a wisp of a caveat: “It’s important that market participants recognize that there is uncertainty about the path of short-term rates,” which wasn’t really a caveat at all and was roundly ignored.
And so we have a series of geniuses: Greenspan who said that the very concept of a national housing bubble in the US was impossible just as the national housing bubble was inflating to monstrous proportions; Bernanke who said that the consequences of sub-prime lending were “contained” just as the consequences of subprime lending were eating up the banks from the inside out; and Yellen who now told us that complacency is nothing to worry about.
So we sally deeper into the Yellen era, which is the same as the Bernanke era, in that the Fed – and other central banks, for that matter – is the only thing worth looking at. Central banks rule. Practically nothing else matters. Metrics and ratios are just for decoration. Markets as a means of price discovery no longer exist.
And if things ever get out of hand, well…. “We have a number of tools,” Yellen reminded us. The tools in Bernanke’s toolbox, the ones he has been using so delicately and with such great success, the tools that already brought us financial repression, asset bubbles and busts, lower real wages, and a whole lot of financial craziness.
Even as the Fed was lowering its guidance for growth, the recovery in the Eurozone has taken off. Politicians and Eurocrats have already taken credit for it. A whirlwind of backslapping has ensued. Prematurely, it turns out. Read…. It’s Official: Despite Media Hype, Eurozone STILL in Recession