Angling for the job of Treasury Secretary?
Lael Brainard, former Under Secretary of the Treasury for International Affairs in the Obama administration and elevated further by President Obama to the Federal Reserve Board of Governors (FRB), and thus a voting member of the Federal Open Market Committee (FOMC), where monetary policy is set, on Monday saved the global markets with a single speech.
Huge relief reverberated around the stock market that the Fed dove remained a dove, unlike another Fed dove, Boston Fed governor Eric Rosengren, who’d scared the bejesus out of the markets on Friday, when he mentioned two of the risks of “waiting too long,” including asset bubbles.
While totally blind to asset bubbles, Brainard, can see, however, the awesome job of Secretary of the Treasury that the rumor mill is already offering her in the “Clinton administration.” So she’s doing her darndest to impress Wall-Street darling Hillary. And sending actual money is one way.
It is perfectly legal for a Fed governor, or any other American, to give a maximum of $2,700 per election to a Federal candidate or their campaign committee. So no laws were broken. But in April, Bloomberg reported that Brainard had made a fourth contribution to the Clinton campaign, this time $1,950, which brought the total she’d contributed to the maximum allowed of $2,700.
But $2,700 isn’t nearly enough to elevate her to potential candidate for Secretary of the Treasury. Some extra credit is required – such as propping up the stock market with verbiage of free money forever.
Brainard was the last Fed head to do what she could to add to Fed flip-flopping before the Fed enters into the quiet period leading up to its policy meeting on September 20-21, when the fate of the world will be decided, it seems: whether to raise the fed funds rate by almost nothing from next to nothing, or leave it at next to nothing.
And so her speech on Monday that caused the S&P 500 to soar 1.5%, thus partially offsetting the swoon caused by Rosengren’s scary waiting-too-long speech on Friday, was full of possibly unintended ironies.
She postulated that the economy is now in a “New Normal” – the old normal as reconfigured by the Fed, a result of the credit bubble the Fed had created before the Financial Crisis, including the entire banking fiasco it was charged with regulating; and a consequence of the Fed’s efforts to revive the credit bubble after the Financial Crisis had blown it up. Thus the Fed has inflated the greatest credit bubble in history, which Brainard called the New Normal, and which now must be maintained come hell or high water.
This New Normal has five “key features,” she said, and they’re the “major reasons for caution” in raising rates, including:
“Inflation Has Been Undershooting,” at least for her tastes, she said. This is due to the great lengths that inflation measurements go to undercount it. For a lot of people living off real wages, inflation has been more than enough.
“Labor Market Slack Has Been Greater than Anticipated,” she said, apparently surprised that bailing out and enriching Warren Buffett and his financial and insurance empire and others who held the most assets since the Financial Crisis did not create demand in the real economy, nor enough good jobs.
“Foreign Markets Matter,” she said, “especially because financial transmission is strong and poses a risk.” She included this gem of real or fake central-bank benightedness:
Japan remains greatly challenged by weak growth and low inflation. Indeed, it is striking that despite active and creative monetary policies in both the euro area and Japan, inflation remains below target levels.
We’ve been lambasting these “active and creative” policies for years because they’re laying waste to the mechanisms of the real economy.
Like Rosengren, she talked about “headwinds from abroad,” but in her view, they “should matter to US policymakers”:
“[G]global financial markets are tightly integrated, such that disturbances emanating from Chinese or euro-area financial markets quickly spill over to US financial markets.“
Emphasis added. This confirms: financial markets are all that matter to the Fed.
They must be inflated – and kept inflated come hell or high water. Even if there’s a depression in the US, the Fed will try to keep stocks from inching down. It’s gotten to be a political thing, and for Brainard, a career thing. The Clinton administration is beckoning, and a market crash could help unwind that opportunity.
“The Neutral Rate Is Likely to Remain Very Low for Some Time,” she said, baffled that eight years of zero-interest-rate policy and three bouts of QE, totaling $3.5 trillion, which amounted to the greatest wealth transfer of all times (from labor, savers, and the future to those who held the most assets) has produced only “very modest” economic growth and not enough consumer price inflation.
Well, what do you expect as a central banker when you use rampant asset price inflation to undo the cleansing process the economy and particularly Wall Street needed, the process of shedding debt that would have allowed the economy to thrive afterwards? Yes, the fetid hot air would have hissed out of some of the assets that Warren Buffett and others so cherish, but the economy wouldn’t have been bogged down forever in Brainard’s version of the New Normal.
So who says the Fed can’t have fun at our expense? Read… The 11 Bone-Chilling Things I Gleaned from Yellen’s Chart
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.