Fed digs in its heels, refuses to taper, though it could still start later this year, soon-to-be-ex Chairman Ben Bernanke said, after years of throwing trillions of dollars around as if there were no tomorrow. Janet Yellen – “leading candidate” to replace him, sez a White House official – was already licking her chops. She too would get to throw some serious bucks around and make everyone happy.
So the Federal Open Market Committee voted 9-1 to keep printing $85 billion a month. Asset bubbles weren’t dangerous enough just yet, though they’re already worse than before the financial crisis, particularly at the riskiest end: junk bond issuance this year will beat the record set just before the financial crisis. And home prices are jumping faster than during most frantic moments of the housing bubble.
Yet the Fed told the world that it would continue doing exactly what hasn’t worked for five years, in the hope that even more of the same might finally do the trick, rather than admitting, tail between its legs, that all QE has done is create asset bubbles.
To the Fed’s greatest disappointment, QE hasn’t even caused rampant consumer price inflation. The reason is simple: the vast majority of consumers never see any of this money that the Fed prints and therefore can’t spend it. They’re struggling with pay cuts, long-term joblessness, utter discouragement, and the prospects of never being able to retire. Demand is anemic, wage increases don’t keep up with inflation, and any further inflation crimps demand.
Instead, the Fed’s moolah is going directly to the largest banks and securities firms – the 21 primary dealers, including foreign outfits – which then redistribute it to their own operations and to their cronies. They’re not buying bread or jeans with it but more assets. Hence, rampant asset price inflation. A connection the Fed claims it hasn’t figured out yet.
To top it off, the Fed’s economic geniuses are blinded by institutional optimism when they issue their longer-term forecasts. They’ll come down to reality at the last possible moment when overwhelming data forces them to. Today was one of those moments. They lowered their economic forecast for 2013 again, now that 2013 is three-quarters finished. And they did so for the third time this year.
Now they think the economy might still grow in the range of 2.0% to 2.3% in 2013, down from their earlier guess of 2.3% to 2.6%, and down from their even earlier guess this year of 2.3% to 2.8%. Ironically, they lowered their forecasts even as QE3, the most drunken money-printing effort yet, hit its full stride early this year. In between the lines, these geniuses are admitting that QE3 with all its magic bells and whistles hasn’t boosted economic growth but hampered it.
They didn’t have to look far. FedEx, one of the thermometers of the real economy, reported quarterly results today. Revenue inched up a mere 2.1%, in line with inflation, nothing more. This is the kind of dreary micro data that has been pouring out consistently.
Just hypothetically, what will the geniuses at the Fed say if the economy slips into a recession even while the Federal Funds rate is nailed down to zero – actually 0.08% – and while the Fed is still printing $85 billion a month? That we need even more QE? To destroy what’s left of the real economy and replace the whole kit and caboodle with asset bubbles?
Rather than blaming Fed policies for the slowing economy – oh no, that would be sacrilege! – they blamed the Federal Government because it’s now slightly less hell-bent on running up huge deficits, though it’s still running up huge deficits. And they blamed the unruly mortgage rates that have jumped on their own though the Fed hasn’t actually dialed back QE yet.
Hence, the Fed’s lower economic outlook for 2013. But the Fed always expects growth to pick up “next year.” So today its wishful thinking produced economic growth in the range of 2.9% to 3.1% in 2014, and an inexplicable 3.0% to 3.5% in 2015. What were they smoking?
I don’t know either. However, that miraculous growth will reduce the unemployment rate from 7.3% now to 7.1% by the end of the year, to 6.4% in 2014, and to 5.9% in 2015.
Given this optimistic scenario, the majority of the FOMC members expected that the Fed Funds rate would remain stuck at near zero until late 2015. By 2016, they might nudge it up to 1.75% to 2.25%. We’ve heard similar stories before. Raising the Fed Funds rate is always about two years away.
In effect, it doesn’t matter what the Fed says it might do in 2015 or 2016 because it can’t even stick to things it said it would do a few months earlier. It flies by the seat of its pants. Anything it says beyond the horizon of a few weeks is worthless. Meanwhile, Wall Street, the big banks, and our over-indebted corporate America want the cheap money and the freshly printed billions, and they’re going to get them from the Fed, regardless of what that might do to the real economy and to the idea that something other than the Fed and its sacrosanct celestial pronouncements might ever matter again.
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