Some time back, we had as Fed Chairman the monetary mad scientist of all time, Alan Greenspan, who launched the modern-day regimen of aggressive, inflationary monetary activism. He was the enabler—if not the creator—of securitization on steroids, the freewheeling (and largely unregulated) derivatives monolith, the so-called shadow banking system and more. He turned what used to be relatively more tame boom/bust cycles caused by economics and occasional malinvestment and over-exuberance into far more spectacular ones.
Next we had “The Bernank,” and for the most part, his inauguration while head of the Fed of outright quantitative easing (Q.E.) policies was the logical—and necessary—extension to Dr. Greenspan. As we witnessed for several years, it took such more direct intervention on the part of the Fed—even to becoming the buyer/monetizer of last resort of Treasury debt and more—-to keep aloft most of the time the various asset bubbles first enabled by Greenspan’s seminal policy changes.
Janet Yellen was to be the logical successor among activist, money-printing Federal Reserve chairs. The “book” on her was overwhelmingly that she would preside over the next phase of the central bank’s “Inflate or Die” quest to keep the banking system, stocks, etc. perpetually levitated. There was little reason to believe that we would have anything but the recent business as usual from the Fed.
This is all the more why it’s admittedly been a challenge to come to grips with what we seem to be getting from the Yellen-led Fed instead. The central bank, when it raised interest rates for the first time in nearly a decade back in December, sent us all a message; one which few seem to understand. What they decidedly did not react to was the economic “data,” which was almost uniformly worse in December than when the Fed punted a few months before.
As I said immediately after, we must consider the probability that for as long as it can possibly get away with it, the Fed will continue its quest to “normalize” monetary policy. (Please see additional commentary on my web site at http://nationalinvestor.com/855/urgent-post-fed-audio-update-chris-thursday-dec-17-2015/)
Having blown various bubbles around the world for so long, the Fed now seems of a mind that it wants to see some air come out of at least some of them. That it belatedly seems to understand that central bank money printing, rate suppression, the suppression of price discovery and moral hazard and such really does not bring you legitimate, Main Street prosperity in the end, is a revelation many are happy to see the central bank embracing.
Yet it is the fact that things went so crazy for so long before the Fed got a little “religion” that heightens the risks of an “accident” or some kind of new liquidity/systemic crisis for the markets. I suspect that—if it has its way—the Fed will pull off perhaps several more rate hikes over the course of the next couple years, even if it needs to slow its telegraphed once-per-quarter pace to keep equity and other markets from going from a mere cyclical bear market phase (one I have come to believe the Fed will tolerate) to a more cataclysmic crash that it won’t be able to ignore. Pulling that off will be quite a trick.
We are also seeing a reluctance on the part of other central banks to do anything new to ostensibly help teetering markets and economies. Bank of Japan officials are sitting on their hands. Despite the Shanghai index slipping below the 3,000 level anew, the People’s Bank of China is disappointing those looking for additional stimulus by the day. Its various moves of late to inject short-term liquidity in the markets are intended not to re-inflate bubbles, but to keep things liquid and functioning normally whichever way the markets move.
Recently, E.C.B. President Mario Draghi did at least dangle a carrot in front of traders, aiding the continuation of rebounds in stocks and even oil, by saying that there are “no limits” to what the E.C.B. could do down the road to keep the banking system alive and to battle Public Enemy Number One: DEFLATION.
That means that the E.C.B. could, by March, reassess its current program (as opposed to June as previously promised.) It’s a good thing too; after all, Europe’s version of Q.E. has thus far not only failed to help the man on the street, but Europe’s banks are still burdened by over €1 trillion worth of nonperforming loans. At least in the case of the Fed, Mrs. Yellen and her crew don’t have that level of worry, generally speaking. America’s banks did rebound fairly well from the financial crisis even if others did not.
As I wrote a couple issues ago, Europe’s still-shaky banks will be adding to the increasing political nastiness in the euro zone over everything from immigration, to a possible “Brexit” and more. Italy has now joined Greece in seeking “urgent” help for its banks. That’s a toughie: some forces in Germany are still resisting the “mutualization” scheme I told you about, and Chancellor Merkel’s political muscle is presently not what it once was.
The Federal Reserve hopes it can keep itself insulated from these foreign troubles (and China’s), and not have to worry about a new systemic crisis in an emerging market nation, an overleveraged financier of a failing energy company or anything else. Good luck on that.
But as things presently look, barring an emergency need to clean up an out-of-control mess, America’s central bank seems strangely sanguine about its rate-hiking gambit. Perhaps we will get more clues in the next few weeks; first from the next F.O.M.C. meeting, then maybe from Yellen’s semi-annual Congressional testimony in February (that should provide for some fun with the backdrop of the election season having gotten underway in earnest!)
This commentary is excerpted from the second regular issue for January, 2016.
Comments/questions can be directed to the Editor, Chris Temple, at chris@nationalinvestor.com
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