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BookmarkOne of the most basic principles on which the Federal Reserve under Ben Bernanke has been operating is going to be severely tested tomorrow, Eric, when we get the Fed’s announcement after this current FOMC meeting concludes.
The Fed believes that its announcements can control and move the markets in whatever direction these central planners desire. So for example, the Fed believes that expectations about inflation are more important than the speed at which it is expanding its balance sheet and the quantity of money….
he Fed has this silly notion that if people believe inflation is not a problem, then it won’t be a problem. So we hear from Mr Bernanke time and again that “inflation expectations” are “well anchored,” regardless of what might actually be happening to the price of food or gasoline.
Listening to some of these pronouncements one would never guess that crude oil is trading over $98 a barrel today which is the highest price this year – until of course you go to the gas station and face reality at the pump. Are people really so foolish to believe a Fed announcement, or the US government’s doctored CPI number, that inflation is not a problem when the rising cost of living continues to erode the living standards of America’s middle class? I don’t think so, and this highlights the point that is about to be put to a test tomorrow.
The behavioral buzzword recently has been “taper.” The Fed is in effect saying that QE will eventually end, and that the markets should expect the $80 billion of debt it is monetizing every month will stop sooner or later, even though it has also been saying that easy money will continue until unemployment falls to 6.5%. But the market isn’t paying attention when the Fed talks out of the other side of its mouth.
What’s more, the market is starting to recognize that tapering QE – let alone reducing the size of its balance sheet – is likely an impossible task given the huge amount of debt that has been monetized. Market relationships have become so distorted by the Fed’s interventions that returning the markets back to normal conditions will be more difficult than gluing back together a piece of broken crystal smashed into countless pieces.
As a consequence, interest rates have been rising, even though the Fed is still buying more government paper. The yield on the 10-Year T-note has been over 2% for almost a month in the face of all this Fed buying. We have not seen that happen since early 2012. I take it as a warning sign that the central planners have backed themselves into a corner. The economy remains weak despite all of the years of stimulus, and the markets are now starting to price in rising inflation. So regardless of how Mr. Bernanke tries tomorrow to explain away “tapering,” it is becoming increasingly clear that inflation expectations are not well anchored.
The important point is that Fed’s ability to control market behavior with its announcements is crumbling. As I mentioned when we last spoke, the Fed and other central banks are in fact losing control. Since this bull market in the precious metals began over 12 years ago, the FOMC has met nearly 100 times. There have been booms engineered by the Fed, like the housing bubble. And we have seen the inevitable consequence of Fed engineering in 2008 and its aftermath which continues to this day.
The central planners running the Fed are about to receive a wake-up call. It also appears that volatility is about to return as the markets spin out of the Fed’s control. What KWN readers around the world have to understand is how truly dangerous the current situation is. The reality is that global markets and the fragile banking system can literally collapse at any moment.”
