Does The Fed Have Any Ammo Left?

So, far, the Fed has done an enormous amount of heavy lifting to try to keep the U.S. – and global – economy afloat during this unprecedented crisis, which – just so far – easily dwarfs the 2008 financial crisis in severity. As scary as things were back then, with many of the largest financial institutions in the world threatened with collapse, we didn’t have to worry about thousands of people dying as a result. This crisis is far worse, and we still haven’t the vaguest notion of how bad it still might get.

Let’s review all of the various Fed moves since the beginning of this month, then let’s talk about what else it might be able to do:

  • On March 3, the Fed held its first of what would be two emergency meetings this month, announcing a 50-basis point rate cut in its benchmark federal funds rate to a range of 1% to 1.25%. That move bombed.
  • It followed that up less than two weeks later on March 15 – a Sunday no less – with another 50 bp cut, to a range of 0.25% to zero. That also had little effect.
  • At the same time, the Fed said it would increase “over coming months” its holdings of Treasury securities by at least $500 billion and its holdings of mortgage-backed securities by at least $200 billion. However, by the end of last week, the Fed had already bought about $275 billion of those securities. As the Wall Street Journal pointed out, “this means the Fed will have bought more than half of the $500 billion in Treasury securities in one week with little sign of restored market functioning, pointing to a growing likelihood for a much more aggressive round of purchases.”
  • The Fed created a Money Market Mutual Fund Lending Facility that would make loans to banks secured by assets from money market funds, similar to what it did during the 2008 crisis, although this time, it would be purchasing a broader range of assets. On Friday, it extended the facility to include short-term debt issued by cities and states.
  • The Fed also said it was creating a new Primary Dealers Credit Facility that would provide major players in the government securities market with short-term loans.

As bold as all of these moves have been, have they actually done anything to restore public and investor confidence? Hardly. While the Fed has driven already low-interest rates back down to zero, it doesn’t mean very much when nobody wants to own any financial assets – whether it’s Treasury bonds or gold or anything else. Not blaming the Fed, but there’s only so much it can do when just about everyone is acting like the world is coming to an end.

But is there more it can do, either under its existing powers or some new Congressional mandate? Continue reading "Does The Fed Have Any Ammo Left?"

Will The Fed Buy Stocks Next?

Since he became Federal Reserve Chair two years ago, Jerome Powell has created a new mandate for the Fed above and beyond its “dual” Congressional mandate to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” (that’s federal government math for you).

Powell has added putting a floor under stock prices, which usually has come to mean when the market reaches correction territory (i.e., prices fall by about 10%). When stocks reach that threshold, count on the Fed to cut interest rates or loosen monetary policy in order to restore order and investor confidence. So far in his tenure, the Powell Fed has been pretty successful in that regard. Even when overall economic conditions (GDP growth and unemployment) provide no justification for lowering rates, the Fed has stepped in to prop up the market.

Now, however, the current panic selling over the coronavirus has tested the Fed’s ability to wave its magic wand and restore peace to the market. As we know, the Fed’s recent decision to make an emergency 50 basis-point cut in the federal funds rate three weeks before its next scheduled meeting proved to be a dud. Investor confidence has now been so spooked by the uncertainty created by the virus that the rate cut caused barely a blip, and stock prices continued to tank.

Moreover, despite the market begging for the Fed to cut rates, Powell only opened himself up to criticism for actually delivering. The cut was either too small, some critics said, or a cut would have no effect in such a situation, so why bother doing it, others said. Yet the market consensus now seems to believe that another 50 basis-point cut is already baked in the cake when the Fed meets on March 17-18. But market anxiety being what it is, there’s no assurance that that will have any effect, either.

Already, many so-called experts are calling for some form of fiscal stimulus, as opposed to monetary stimulus, such as a Continue reading "Will The Fed Buy Stocks Next?"

Are Bonds Still Relevant?

Do bonds have a place anymore in your portfolio in the new Federal Reserve paradigm?

The Fed has a long history of creating asset bubbles, then later – sometimes years later – letting the air out of the balloon through monetary policy or regulatory change, leaving investors licking their wounds.

The most recent and most dramatic bubble inflation and subsequent deflation, of course, occurred in the first decade of this millennium. Through a policy of low-interest rates, the Fed largely encouraged American consumers to borrow heavily against their homes, while its laissez-faire regulation of the banks it’s supposed to monitor allowed these same consumers to borrow whether or not they had the wherewithal to pay the loans back.

We all know what happened when the Fed suddenly reversed course and raised interest rates and, perhaps more importantly, required banks to make their customers actually prove that they were good credit risks (imagine that?). We’re still feeling the fallout more than 10 years later, as millions of people defaulted on their loans because they couldn’t borrow any more money.

Now we have a similar story, only with stocks and bonds, but the Fed has taken a different attitude. It’s showing no inclination to prick the bubble it has created in financial assets through historically low-interest rates for a historically long period of time and through quantitative easing, i.e., attempting to corner the market on U.S. Treasury and mortgage-backed securities basically.

Yields on long-term government securities are now at their all-time lows, mortgage rates are at or near their all-time lows, while stocks are near their all-time highs even after this week’s coronavirus-inspired panic selloff. Yet the Fed has not responded as it has in the past, by letting some air out of the bubble, Continue reading "Are Bonds Still Relevant?"

Judy Shelton And The Fed

I come not to praise Judy Shelton, nor to bury her. But the blanket media and political condemnation of her as President Trump’s latest (I forget which number we’re up to) nominee for the Federal Reserve Board strikes me as having nothing to do with her actual qualifications for the job but rather a reflection on her sponsor and her failure to be “the right kind of people,” meaning someone who doesn’t subscribe to the establishment groupthink.

During the several days prior to her confirmation hearings before the Senate Banking Committee last week, and back when she was first nominated, there was a flurry of scare headlines and stories about her unfitness for the position. No less than the sanctity of the independence of the Fed and the security of the U.S. economy was in jeopardy if she was confirmed. Here’s a small sample:

  • New York Times: “As Congress Prepares to Vet Judy Shelton, Worries About the Fed’s Future Mount”
  • Washington Post: “Republicans Must Protect the Fed From A Flagrantly Unqualified Nominee”
  • Bloomberg: “Judy Shelton Would Destroy Trump’s Pro-Worker Legacy” (as if Bloomberg would acknowledge any Trump accomplishment)
  • CNN: “Trump’s Fed Pick Isn’t Just a Gold Bug – She’s Also a Crypto Bull”

The Post also provided 10 of what it says are her “most controversial quotes.”

Controversial quote number 1 was this: “I don’t see any reference to independence in the legislation that has defined the role of the Federal Reserve for the United States. It would be in keeping with its historical mandate if the Fed were to pursue a more coordinated relationship with both Congress and the president.”

Indeed, how independent can the Fed be when its members are appointed by the President and ratified by the Senate? And it funds itself by buying massive amounts of government securities. Not to mention that Congressional mandate thing. Is it unreasonable to expect an agency that has a Congressional mandate might actually have to report to Congress every so often to make sure it’s adhering to that mandate? Continue reading "Judy Shelton And The Fed"

QE or Not QE: The Consequences Are The Same

It may look, swim and quack like one, but Federal Reserve Chair Jerome Powell insists that the Fed’s recent reinflation of its balance sheet past the $4 trillion mark isn’t quantitative easing. Oh no, he says, just because the Fed’s portfolio recently rebounded to $4.175 trillion at the middle of January, up from a six-year low of $3.76 trillion since the beginning of September, doesn’t mean that the Fed is back to its old QE ways, which had pushed the Fed’s balance sheet to a steady $4.5 trillion between 2014 and 2018 when it started to shrink.

But QE by any other name is still QE.

At least one voting member of the Fed’s monetary policy committee has expressed some concern about the recent boost in the Fed’s balance sheet – more than $400 billion in just the past four months.

“The Fed balance sheet is not free and growing the balance sheet has costs,” Robert Kaplan, the president of the Dallas Fed, told reporters at a recent Economic Club of New York event, according to the Wall Street Journal. “Many market participants believe that growth in the Fed balance sheet is supportive of higher valuations and risk assets. [That’s Fed-speak for a bubble]. I’m sympathetic to that concern.”

For the past 12 years, ever since the financial crisis in 2008, the Fed has swollen the size of its balance sheet – its holdings of U.S. Treasury and government-insured mortgage-backed securities – from less than $1 trillion to more than four times that. Its first burst of bond-buying took place in 2008, during the depths of the meltdown when its portfolio more than doubled in less than a year. It then gradually increased to more than $3 trillion over the next five years, at which time QE took it to $4.5 trillion, where it held steady until 2018, when the Fed started to allow its holdings to run off as they matured, until its recent policy U-turn.

And what was the direct result of all that buying? Continue reading "QE or Not QE: The Consequences Are The Same"