The Golden Age of Fed Omnipotence
The entire financial community waits with bated breath for the answer to the one question: will she, or won’t she?
One woman holds sway over the world financial markets. She has the power to make or break vast fortunes, equivalent to several times world GDP, just by uttering a few words. Words which will be parsed and discussed and debated and analysed and written about and talked about excitedly on all news channels by bright-eyed news anchors, for several days thereafter.
We’re talking about whether the Federal Reserve will increase its Fed Funds rate by 0.25% above zero. Zero! That’s the level it’s been at since December 2008. Seven years of zero interest rates to prop up the “economy”. Seven years of destroying savings, capital formation and distorting the production structure of the economy. But no, that’s not enough. We need more of zero interest rates and stealth QE. The Fed won’t hike rates, nor will they contract their balance sheet. They will keep rates at zero and re-invest the proceeds from their bond holdings into more bonds, effectively monetizing a portion of US govt and agency debt. They will keep doing this till the markets tell them they can’t. Until something breaks. Like a bond bubble bursting, or a currency collapsing on the back of too much debt, or price inflation coming back with a vengeance, driven by currency debasement.
But that’s all in a far-off future beyond our ken. For now, the markets are happy and can continue to make new highs knowing that the Fed has their back. They don’t care for Hayekian triangles or even simple economic facts such as savings are the driving force of a progressive economy. This is the Golden Age of Central Bank Omnipotence. What central banks say, the markets do. Like all manias, this too shall pass. When it does, everyone will see what the child saw all along – that the Emperor had no clothes on.
It doesn’t take a Cassandra to predict that this will all end very badly indeed. Common sense tells us that. Now is definitely not the time to be picking up pennies ahead of an oncoming train… but it’s just so tempting to over-reach for that next small profit. Those who warn of the risks are wrong; I’m making money while they’re not! I’m smart to stay in this long term bull market, with a nice tailwind supplied by the central banks.
Until I fly too close to the sun.