A Two Day Meeting For This?
We always report on the FOMC rate decision (although it is actually no longer a 'rate' decision these days), as we are committed to doing our part for Kremlinology. Parsing the statement is usually not very exciting, but it has become even less so ever since administered rates have been pushed to zero by the planners. Since these days the idea of 'tapering' their asset purchases has been shelved until further notice as well, the potential for excitement has dropped to about the same level as the Federal Funds rate.
They have still managed to make the whole exercise even less rewarding than it usually is. To see why, we invite readers to consult the WSJ's trusty 'Fed statement tracker'. As you can see there, the changes in the October statement relative to the September statement were few and largely meaningless. Even as well-trained Kremlinologists we are cannot really discern the difference between this sentence from the September statement…
“Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace.”
…and this one from the October statement:
“Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace.”
Our guess is that what they are trying to tell us is that the economy continues to essentially go nowhere. That is not exactly big news, but of course they have to put something in there.
The only other change in the statement was the following. September statement version:
“Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth.”
October statement version:
“Available data suggest that household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth.”
Apart from adding the filler 'over the past year' somewhere further down in the statement, that's it. The rest is an exact copy of the September statement.
They needed a two day meeting to come to these conclusions? We would suggest that FOMC meetings could be made considerably cheaper and less time-wasting by replacing them with one to two minute long conference calls over Skype. For instance, the October meeting could have gone as follows:
Chairman: “Everybody here?”
All: “Yes”; “Yeah, I'm here”; “Think so”; “Hey, where's Esther?”; “She mailed in her usual dissent”; “Yup”; “Where's Jimmy?” “I'm here numbnuts”; “OK, I think that's everybody”.
Chairman: “Good, let's start then. Everybody agree with me the economy's still in the crapper?”
All: “Yeah”; “Mmm-hmm”; “Yup”; “You can say that again”.
Chairman: “OK then. Let's xerox the last statement, and maybe throw in something about the housing market being even crappier than last time around. Any objections?”
Bullard: “Did we have that thing about inflation being too low in the last one?”
Bullard: “OK then.”
Chairman: “Anything else?”
All: “Nope”; “No”; “Fine with me.”
Chairman: “Alrighty, that's that then. Bye all!”
All: “Bye!”; “See you around”; “Toode-loo”.
End of Conference call.
So they will keep printing at the same pace as before, which is what everybody of course already knew prior to the October meeting.
After this complete non-event of a Fed meeting, AP journalists still managed to come up with the following utterly bizarre headline overnight: “Asia stocks down on fears Fed may quicken tapering”.
The article explains:
“Asian stocks were mostly lower Thursday, spooked by concerns that the Federal Reserve may accelerate plans to ease its economic stimulus.
In its latest policy statement, the U.S. central bank said Wednesday it will continue buying $85 billion in bonds every month and keep its benchmark short-term interest rate near zero. The bond purchases are designed to keep borrowing costs low to encourage hiring and investment.
The Fed said it would "await more evidence" that the economy was improving before starting to pull back its stimulus program.
While the Fed's announcement was mostly expected by investors, its comments that there was "underlying strength in the broader economy" spooked markets and raised fears that tapering could be brought forward three to four months, said Evan Lucas, market strategist with IG in Melbourne, Australia.
"Expectations had been for tapering to start in March or April next year, today's call saw the street moving its predictions to January which saw hot money exiting," he said.”
The only problem with this assertion is that the comment about 'underlying strength in the economy' was simply copied word for word from the September statement. So what happened on September 18, when the phrase was first included? The stock market rallied strongly on that day:
The alleged effect of a phrase in the FOMC statement on the stock market on two different occasions.
In reality this groping for 'reasons' that are supposed to explain day-to-day market movements is complete nonsense. We have even seen occasions when the same underlying reason was used to “explain” diametrically opposite market reactions on back-to-back days.
With regard to the 'underlying strength' in the economy, if there really is such strength, then why does the Fed continue to print money like there's no tomorrow? The reality of the matter is that what little evidence of strength there is visible in macro-economic aggregates is largely smoke and mirrors that is entirely dependent on monetary inflation – in fact, if this illusion of strength is to be maintained at all, the pace of monetary inflation will probably have to be increased soon (which in turn will structurally weaken the economy even further).
The idea that this phrase in the FOMC statement gives us any hint as to the timing of the mythical 'exit' is simply ludicrous. Let us not forget that when this phrase appeared for the first time, it did so concurrently with the decision to delay the much-dreaded 'taper'. There are many reasons why the stock market looks ripe for a decline, but this isn't one of them.
A Way to Stoke Inflation Further?
One of the 'problems' the Fed faces is that private banks are not expanding their inflationary lending, i.e. the creation of fiduciary media from thin air on the part of the banks has come to a virtual standstill lately. In this context a friend of ours pointed out to us that the central bank could possibly decide to try to combine 'tapering of QE' with an increase in inflationary lending. In other words, a method to stoke monetary inflation further, while making it appear as though the central bank was 'holding back'.
The idea he has in mind is that the Fed could decide to simply cut the interest paid on excess bank reserves. Since these reserves can only be employed for interbank lending purposes, it makes at the moment no sense to lend them out to other banks. Since the Fed pays interest of 25 basis points, while LIBOR sits at 17 basis points and the effective Federal Funds rate is oscillating between 8 to 12 basis points, there is no mileage in interbank lending.
No doubt it would be an incentive to look for ways increase inflationary lending if the interest rate on reserves were cut in order to replace the lost income. Note in this context that due to the piling up of excess reserves, this is actually the only tool left to the Fed to manage interest rates. It can only push the FF rate up by selling huge amounts of assets, but that would immediately lead to a stock and bond market collapse. The central bank is indeed completely 'boxed in' by now – which is also why the so-called 'exit' from 'QE' will forever remain elusive.
However, there is one problem with the idea that cutting the rate paid on reserves will lead to more bank credit creation: banks only need to borrow reserves from other banks if they create so much new deposit money that they have a shortfall in terms of 'required' reserves. However, for all intents and purposes, required reserves are close to zero anyway.
Meanwhile, credit demand remains very low (with the exception of credit demand for speculative purposes, i.e. for credit used to buy financial assets) and banks are probably unwilling to lend because the risk of not getting repaid is deemed too high. This risk is directly related to the state of the economy's pool of real funding. If banks judge that the real economy cannot support an increase in credit, they won't make new loans. We suspect therefore that central banks, including the Fed, will become even more 'activist' in the future.
Chart by BigCharts.