Fed Keeps Us Guessing
You know how the debt ceiling deal made everybody mad? It looks like the Fed is playing the same game. The FOMC’s announcement didn’t promise anything “bold” like Scott Sumner, Paul Krugman, Tyler Cowen, and “the markets” were hoping, but they also didn’t promise to let their balance sheet shrink and let Treasurys find their natural price.
Instead, the Fed promised to keep interest rates at their current, exceptionally low level, through mid-2013. This had people on NPR in a twitter, because previously the Fed had just talked about “for an extended period.” We’ve never heard such specificity before! When Bernanke sees the world collapsing, he gets specific.
I haven’t heard such parsing of language since my single friends were trying to figure out “what did Alicia mean when she texted that?”
I thought they would be a little more agressive(maybe hint at QE3 or cut rates on reserves held at the fed) considering the revisions to GDP, employment slack, and recent market action – especially considering Bernankes desire to create positive wealth effects – but they seemed to have disapointed the markets.
The whole treasury curve (espeically the short end) and the out-months in eurodollars had some very big moves on the news, basically pricing in infinite ZIRP. The late day rally was more of a technical/sentiment based reversal.
BTW, the last 30 minutes in the equity futures was some of the craziest action I’ve seen in a while; the russel futures moved up 35 pts in 25 minutes! There are months when it doesn’t do that.
I wonder: When (hyper)inflation hits and Bernanke & Co. can’t pull enough liquidity out of the market to stop it, what personal consequences are they going to face? None? Do they not have any skin in the game for the power they wield to expedite the economic ruin of the United States of America?
If I was an MMTer I would respond that Bernanke should just tell Obama to raise taxes and/or lower spending to halt inflation. Nevertheless it is stupid to make such a promise yet anyway, and they better should get real spending going now.
Agree MamMoth?
Murphy, I am literally scared on how much malinvestment must have been infused into the economy on the basis of a 0-0.25% fed funds rate that has been in place going on almost two years now, as well as what we now know will be for the next two years as well.
I am seriously having dark thoughts about the future. I fear the rioting in the middle east and in the UK happening all over the US.
I own gold, silver, agriculture, as well as some money market funds. I’ve been doing OK, but I feel a little lost.
How can Bernanke, anyone, be this destructive? Will we be free in 5 years or will we be living under universal price controls and socialism? Should I leave the country?
MF, you could follow AP’s advice and go long on Treasuries and short on gold (if you had half a brain, that is). On the bright side. the inevitable explosion in public debt will cause an explosion in private savings which will pave the way back to prosperity.
đ
Thanks Daniel. I was getting worried. Further, His Lordship Lord Keynes explains that there really isn’t that much debt to worry about:
http://socialdemocracy21stcentury.blogspot.com/2011/08/who-owns-us-public-debt.html
Daniel, are you putting your wealth in Treasuries right now?
Just wondering if you’re putting your money where your mouth is.
I’m pretty sure he was joking
Oops, sorry.
I’m pretty dense today.
Go to Somalia. Murphy thinks it’s doing great. I suspect he runs a pirate joint over there.
Ditto.
But they will blame it on the imaginary cuts in spending.
What I don’t understand is how the Fed “knows” that interest rates should be near-zero into 2013. Even assuming it knows that they should be such now, are its predictive abilities good enough to forecast the next two years. If not or at least if markets think not, how meaningful is the new specificity?