Entering text into the input field will update the search result below

Fear and Loathing in the Eccles Building

Jan. 25, 2011 9:53 AM ET
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Man, to be a fly on the wall in the Eccles Building (where the Federal Reserve Board of Governors reside).  Bernanke & Co. must loathe thinking of the unwind to the current policy stance.  Just as the ECB is trapped, how exactly is our central bank going to halt their bond purchases and then raise rates?  There is housing, debt servicing, the interest-rate risk within the balance sheet and of course the mandate to maximize employment that either keeps Bernanke up at night, or should.

 Let’s touch briefly on each of these topics that are forefront in the mind of Bernanke. 


  • Ø  Housing demand is weak (sure we’ll see monthly pops on occasion but on average home sales are way too weak to absorb the coming supply).  Bernanke is surely thinking about this market, and what an increase in rates will do to further soften sales, which risks another big leg down in prices and more trouble not just for households but for the banks.
  • Ø  Federal government debt servicing is running about 12% of revenues and 8% of spending.  That’s just on marketable debt, add in unfunded liabilities for Medicare and Social Security and you get to 18% and 12% -- even at these silly-low interest rates.  Even a mild tightening, say to 2.0% fed funds, drives debt-servicing to roughly 30% of revenue and 20% of spending.  If interest rates were to fully normalize then we’re talking the funds needed just to service the debt overtakes those needed to fund Social Security. 
  • Ø  The Fed is buying all of those longer-end Treasuries, which should approach $500 billion by June 30 using a conservative assumption.  As interest rates rise, those positions will get crushed.  As former Federal Reserve Bank of Atlanta President Bill Ford recently stated, the Fed will move from sending profits to the Treasury to needing cash injections from the Treasury as the losses mount.
  • Ø  Then we have the Federal Reserve’s mandate to maximize employment.  At 9.4% (and going to test 10% again before the jobless rate goes lower) employment is hardly maximized.  The so-called “natural rate” of unemployment is roughly 5.5%, which is what policymakers define as maximized employment.

 So how exactly is the FOMC going to reverse course in a timely manner if price pressure continue to build?  The likely answer is they won’t. 

 Undoubtedly, the Fed has backed itself into a corner, and their job hasn’t been made any easier by a spendthrift federal government.   Ultra-easy monetary policy and massive public-sector spending may have caused things to look better in the very short-term (although one can argue that the government spending has hurt job growth), but increases the challenges ahead.  We’ve talked about these topics for quite a while now and they’re among the main reasons I’m not constructive on this move in stocks.    

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.