The Fed's 'Improvisation' Phase

Tyler Durden's picture

Via Morgan Stanley's Vincent Reinhart: Writing Prescriptions

Nine years ago while on a panel at the Federal Reserve Bank of Kansas City’s Jackson Hole Symposium, I quoted Franz Kafka. In “A Country Doctor,” he has his protagonist admit ruefully, “To write a prescription is easy, to understand people is hard.”

That sums up the problem at the Fed as they try to translate the advice from economic textbooks to the application of policy by the diverse group of people on the Federal Open Market Committee.

Individually, most Fed officials accept the chief recommendation of monetary theorists, such as Michael Woodford of Columbia University, about how to conduct policy when the nominal federal funds rate is stuck at its zero lower bound. Policy works best if the Fed links its instruments—how long it stays at the zero bound and how much it expands its balance sheet—in a predictable fashion to economic performance relative to its goals.

What are the advantages? The minutes of the September meeting explained the benefits of such an approach as:

“… including the potential for enhanced effectiveness of policy through greater clarity regarding the Committee's future behavior. That approach could also bolster the stimulus provided by the System's holdings of longer-term securities. It was noted that forward guidance along these lines would allow market expectations regarding the federal funds rate to adjust automatically in response to incoming data on the economy.”

Add to that the notion that once a rule is in place, the Fed does not have to respond data-point-by-data-point in resetting the monetary policy bar. Announcements following changed economic circumstances are a mixed bag, as they convey both the Federal Reserve’s willingness and need to act. Often, news on the latter—that the Fed has shifted its economic outlook lower—partly offsets the impetus associated with the former—that it will provide more support to activity. Lastly, an intelligently designed rule will be symmetric, thereby relating the triggers to provide more accommodation and those to remove that accommodation. Reassurance that the Fed has a built-in exit strategy might allow a more aggressive pursuit of its goals.

If a conditional policy rule works so well in theory, why has it not been put into practice? We have been emphasizing for some time that the fundamental design flaw of the Fed is its ambiguous mandate. The Congress instructs the Fed to foster maximum employment and price stability but gives no guidance on weighing deviations from those goals in the short run. The people making policy at the Fed do not agree on how to fill in the Congress’s silence on this issue. If they cannot agree on the weights, then they cannot agree on a rule. As a result, the Fed is living out a collective action problem, in that officials individually support a rule but collectively cannot agree to a single rule. You have but to admire the drafting delicacy of Fed staff preparing the minutes in their summary of the issue that “…reaching agreement on specific thresholds could be challenging given the diversity of participants' views…”

Despite media reports pressing the case that Chairman Bernanke is conducting a harmonious chorus, Fed officials are not on the same page of the hymnal. Consider the tabulation of views of “appropriate” monetary policy in the latest Summary of Economic Projections. Even though the Fed issued a commitment to keep the policy rate low until mid-2015, six participants responded that policy firming should begin before then. The Fed also promised open-ended balance-sheet expansion in its statement, but only eleven of the nineteen FOMC participants held that additional asset purchases were appropriate in the near future.

Fed officials are now in the improvisation phase of their monetary policy experiment. Policy makers have told us that they will do whatever it takes to get what they want. The problem is that they have not told us specifically what it takes or what they want.

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AUD's picture

And to cut to the chase; The Fed, & all other government banks, are monetising junk. Therefore the obligations of said government banks, are junk.

knukles's picture


New Monetary Policy Directive.


"Ere, whazzat, mate?

Is a bloody poke at it idn'I now?

A poke?  'Ere mate, best rub it right.  Grip 'er too bloody hard and it'll squirt to the left now, won'it?

Oy, leave off , wanker.

Best withdraw before your time lad.

Ah, bugger off.

So what's it worth then, governor?

Bloody nuffin', id it?

markmotive's picture

QE Fail

Jim Grant on QE Infinity, financial levitation and other economic fallacies:

The Alarmist's picture

It is simply an attempt to have capitalism without capital.

All Risk No Reward's picture

The Federal Reserve is simply ripping society's face and relying on article writers to distract people with various false narratives that never make the true operation obvious.

max2205's picture

Wow TD you guys are busy this Saturday.

TheSilverJournal's picture

An "interest rate" is not that hard of a concept. A lot of very bright people for some reason can't quite connect to what an interest rate is. An interest rate is the price of money.

Q) "What's the price of money?' you might ask. A) "check the interest rate."

Q) "How much does money cost?" A) "Well, look at the interest rates."

Q) "How much do I have to pay to borrow money over time?" A) What's your interest rate?

Artificially lowering rates has detrimental consequences. Lowering rates makes it appear as if the party is going strong, when in fact there is no party. Lowering rates makes it appear that borrowing and consumption is rampant, when all that's really happening is that future production is being stolen from. Lowering interest rates makes it less appealing to save an invest and more appealing to borrow and consume.

Because lowering rates destroys capital, the only way to keep the party going is to continue to lower rates even further. They can't even be kept the same. Now that they're at 0% + QE, the only option to keep the system from imploding is to increase the rate of QE. MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE, MORE QE.

knukles's picture

"More QE"
This message has been approved by Paul Krugman.


Actually, one might suggest the Price of Money to be that which it might be Exchanged for... price of gold, pork chops, Volts, votes, etc...
Whereas an Interest Rate is the Rental Cost of Money.

TheSilverJournal's picture

Krugman gets that part. He also very conveniently forgets that lowering rates + QE destroys capital.

knukles's picture


SJ, I'm not really sure what Paulie (let alone any of the rest of those dimwit poster children of the Left) really and truly "get" anymore.
Mayhaps my patience has worn thin.  Possibly I'd allowed far too much consideration of such folks being civil, rational, mature and of character.
But I've become tired, restless and discontent with their continued drivel, ad homein attacks, illogical and soundless diatribes.
I'm fed up with being called a racist for not supporting somebody else's economic and social policies, no longer shocked when the left wing media publicly claims after the debate that they need to change their script, and more than aggravated when I hear that more QE and deficit spending is the answer as just not enough has been done, yet.
When in the course of human history, both the scope and magnitude of expansive monetary and fiscal policy should if that were the truth, have the economy overheating, a shortage of workers...
And yes, he very conveniently forgets the Law of Unintended Consequences let alone Consequences.
I am tired of self serving demonstrations of half truths and lies in the quest for money power property and prestige.
The whole system sickens me, a moral abyss.
While I have been one of the few who've believed for decades the whole bloody thing has been broken, institutions failures, that we have been running on a short fuse, I have reached a point where I am disgusted and angered... wanting only to see every incumbent embarrassed out of office.
And thus have become full willing to blame those in the seats of power for having perpetuated the ignoble decline of the very fabric of civilization.

May they all burn to death in their paper boats crossing the flaming river of blood in the 7th circle of hell....

TheSilverJournal's picture

Don't hate the playa, hate the game. These people are not the problem, the problem is mine, yours, and everyone on ZH's acceptance of the game. The problem is within ourselves.

RockyRacoon's picture

Restless, irritable, and discontent.  True enough.

When all becomes bleak and dark I just try to remember that the whole circus is about saving banks, bond holders, and profits from non-productive efforts.   Then it all makes sense, every move is predictable, and the outcome certain.

LMAOLORI's picture




Krugman's just like his president and policy makers don't have to tell us what they want their actions speak volumes


A Very Confused Obama and His Obsession with Labor


TheSilverJournal's picture

The price of money IS NOT that which it might be exchanged for something else, like gold, etc. The price of money is, like you said in that latter, the rental cost of money. THAT IS HOW MUCH MONEY COSTS. 


ACP's picture

Ah yes, central banker comedy.

A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Let’s build a fire and heat the can first." The economist says, "Lets assume that we have a can-opener..."


Bernanke walks into a pizzeria. When the pizza arrives, the server asks, "Do you want me to cut it into 6 pieces or eight?"

Bernanke replies, "I'm rather hungry right now, better cut it into 8 pieces."


RiverRoad's picture

Improv makes great theater.

Racer's picture

zero percent for the bankstas but waaaay more than that for the sheeple...

Dr. Engali's picture

The fed has been improvising for as long as I have alive. I've witnessed implosions time and again with each episode worst than the the one prior. It is inevitable that they blow the economy up again. Only this time there won't be any way to contain it with the bloated balance sheet that they have.

knukles's picture

Doc, the only time I recollect a considered, well crafted monetary policy was under Volcker... beginning with the Saturday Night Massacre.
Artful, amazing in it's elegance and shock therapy.
No wonder the politicians must need his removal at the end of term.

And what with we have going on now, it's gonna take another program similar to his Targeting of the Quantity of Money, Rates be Damned to at Some Point in the Future, rectify the mess that's gonna surface as soon as Velocity rebounds....
Whata fucking mess.

Dr. Engali's picture

I agree but I don't think it's possible this time. Any raising of the rates will put the Feds bloated balance sheet underwater and they will be insolvent. Especially the rates that we need to mop up this excess liquidity. Not to mention they are extending duration, if they raise rates under those circumstances their portfolio will get creamed. Another issue that we have now that Volker didn't have to contend with is the derivatives market. It won't take much to blow that up. No... I don't believe there is any way out of this mess. They know it that's why there is QE infinity monetary policy.

Manipuflation's picture

"Another issue that we have now that Volker didn't have to contend with is the derivatives market."

You nailed it Dr. E.  There are only two options to deal with derivative exposure:  Institutional collapse or the taxpayer credit card.

helping_friendly_book's picture

Didn't the BIS already set the precedent, with respect to derivatives, by declaring Greek bond haircuts a no-event for CDS exposure?

knukles's picture

This time?
Agreed...  for all the reasons you suggest.
Great insights. 

Not many folks around who remember first hand those days.
Glory days of bonds and bond daddies. 

The greatest set up of value ever in modern times.

15 3/8% par non-call 30 year treasuries


helping_friendly_book's picture

The "Volcker....Midnight Massacre" was unknown to me. Since you used the term in your comment I looked it up and found this article for anyone that cares.

It will be a massive calamity for sure!


Manipuflation's picture

The BOYZ always manage to do it though.  Some liquidity seems to leak through but nowhere near on the scale of the ctrl-P button print and buy our own debt rates over the last four years.(price discovery?)  I do agree with you that someday this sucker must implode/explode.  WTF are the BOYZ planning to do with all of that freshly printed up cash sitting in the primary lenders vaults and hardrives?  How about the fed considers stopping capital reserve payment to the primary lenders .25% and instead charges them -.25 percent on cash reserves?  Wouldn't that be interesting for the price effect of everything under the sun? 

It's like we hit the pause button on some shitty movie that we really didn't even want to watch,(for the last four years) but we still have to watch it anyway because our significant other really likes the movie.

Fuck it.  Where is the liquor?

helping_friendly_book's picture

The FRBNY is already collecting their 0.25% from Primary Dealers through inflation. Your bank will start passing this through to the consumer through transaction fees. They have eliminated the neccessity for currency though the debit card/EBT, direct deposit regime and it is just a matter of time before the bank will charge you a fee for withdrawls at ATMs and transfer payments to creditors. 

They, truly, have us by our balls and will soon start squeezing. 

When the petro-dollar scheme collapses, which will happen when Petrobras starts pricing their 100 billion barrel reserve in reals, the US Gov't will have no means to finance deficit spending and total war will, surely, ensue.

Will the people be able to stop this madness?

Manipuflation's picture

Is not the FRBNY a primary itself?


helping_friendly_book's picture


Primary deallers are Fed toadies.

Same Kabal. Different roles. Same objective.

Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.

q99x2's picture

Look I've read philosophy, the collected works of Jung, taken linear algebra and differential equations, had an LLC, S Corp. 501C3, business partners, written many a proposal and RFQ, and lived with Elite nobility and bums, and I can tell you this much, no one on this planet, no humans, talk in such double speak except shyster bankster M'Fers, Chauncey Gardner and treasonous politicians. Thier kind won't stop until they are thrown into prison.

kito's picture

Yes, I look foward to an immediate u.s. default on a "rates be damned" policy.....lets imagine what interest on 20 trillion in principal will be when the treasury is looking at 29.99 percent least they will know the pain of what the average person has to deal with when getting sucked dry by citicard.........

kito's picture

Dunno but that drip drip drip downward of interest rates over the past decades smells like something more than improv.......

disabledvet's picture

here's your soundtrack...with visuals:
even looks like the Fed hard at work. At least "their minds at work" while the rest of us figure out how to "figure it all out"...

Peter Pan's picture

I briefly tried googling to see how many employees the US Federal Reserve has and could not find an answer so far. The closest I got was over 300 million and soon over 6 billion if we and the world allow them to continue on as they have so far. I guess that is their true mandate.

Peter Pan's picture

Helping friend thanks for the link but that's Federal Employees NOT Federal Reserve Employees.

helping_friendly_book's picture

That shit is top secret. No one knows except the head squid.

Are their paychecks written on FRBNY checks?

Go to Jackson Hole and observe.

I'm sure the important ones are there.

Most are just paper pushers clearing checks I would think.

Overdrawn's picture

Mega-Bank’s Plan to Steal Your Money and Blame Fake Muslim Cyber Attack

Just as the false flag bomb threats called in by anonymous members of al-Qaeda earlier this month, this banking threat has the hall marks of a state-sponsored false flag to unnerve the American public, mask a planned implosion of the US economy through the ultimate theft of the banking cartels: the money deposited into private checking accounts by banking customers.

On August 9th the banks were given the legal authority to steal money from their customer’s private accounts just as Jon Corzine had with MF Global with the ruling on Sentinel Management Group.

Based on the ruling, regulatory systems such as the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SPIC) will not insure customer funds, investments, depositors and retirees who hold accounts in banks. In fact, the FDIC has announced that beginning in January 2013, they will stop insuring all deposits. Of the estimated $1.6 trillion in deposits, and a measured 85-90% in the hands of the mega-banks, large depositors are expected to close their accounts due to the lack of security.

The money in deposits will be funneled through the US Treasury for short-term securities. It is expected that the US Treasury will offer negative interest rates and this combination will surely cause a run on the banks that will put Spain and Greece to shame.

Let The Wurlitzer Play's picture
  1. The ambiguity of the feds mandate is by design.  Both conrgess and the fed like the lack of clarity in mission and results.
  2. The fed does NOT control the economy although they would like to think they do.  If you could control the US economy with interst rates and bond purchases we would be at negative unemployment and everyone would be wealthy.  At best the fed can create asset and currency distortions.  Sorry benrnanke your not that great.
  3. The only real entity that has any power to unleash the economy is congress.  Congress can reduce regulation, remove goverment involvement in ALL markets, stregthen our budget and currency and defend property rights.

Unfortunately congress is filled wilh selfish people that have no courage.


polo007's picture

Ken Volpert, head of Vanguard's Taxable Bond Group, oversees more than 40 index and actively managed taxable bond funds, with combined assets of more than $375 billion. Here he offers his outlook for bond investors and perspective on recent developments in this critical sector of the investment marketplace.

The current bull market for bonds began in the mid-1980s. Do you think bond investors realize the good times can't continue forever?

Ken Volpert: The Federal Reserve is forcing real interest rates into negative territory in order to reduce government and private debt burdens over the next decade. The result is that very small returns, less than 2%, are expected for Treasuries over the next few years, and slightly higher returns, about 3%–4%, for corporate bonds.

Eventually, after the deleveraging cycle has finished and the Fed stops promoting negative real rates, those bond returns will turn negative as real rates move back up to 1%–3% levels. I don't know if investors are aware of this outlook, but I would suggest they should understand the point we have reached and act accordingly. In addition, if the bull market for bonds means that investors' portfolios have developed a bond "overweight" in recent years, it may be time to consider rebalancing back to their long-term target.

polo007's picture

To recap, the Fed will buy $40 billion of agency mortgage-backed securities per month. It will also continue two other programs: 1) extending the average maturity of its securities holdings (although only through the end of the year) and 2) reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. Together, these tools should increase the Fed’s balance-sheet exposure to longer-term securities by about $85 billion a month through the end of 2012. The goals are to put downward pressure on longer-term interest rates, specifically mortgage rates, and support the housing sector by encouraging home purchases and refinancing.

What makes this round of stimulus so different, and potentially more far-reaching, is that the Fed can increase asset purchases as needed, and the program is not tied to a timeline. The Fed will look to employment—more specifically the quality of employment—to gauge whether to ratchet up or down the program, and to decide when to end it. Interestingly, the Fed has implied a shift in its policy response by setting interest rates with a greater focus on unemployment and the economy, rather than inflation expectations, as it has done historically.

polo007's picture

Neither the Democratic nominee nor his Republican challenger had anything compelling to say about the big issue of our times. How a once proud capitalistic country has become so mired in debt, so unprepared to live within its means and so reliant on the iniquitous policies of its central bank to keep it chugging along as it heads towards a financial cliff.

For months the Federal Reserve has been priming the US economy by printing money. In financial terms it's like giving a drunk more booze to wean him off last night's hangover.

In the United States it's called "quantitative easing" - a pernicious policy that is somewhat akin to global financial warfare. A "winner takes all" approach keeps the US dollar artificially low and beggars competing exporters from other economies like ours as the former New Zealand industrialist Hugh Fletcher touched on this week.

There is a real sense of frustration and anger among our own exporting community at the impact of this self-centred US policy on other nations. The US has strongly resisted suggestions that the greenback should no longer be the global reserve currency and that the commodity trade should no longer be denominated in US dollars.

Federal Reserve chairman Ben Bernanke has indicated quantitative easing will end soon. But few serious players in the financial markets believe this is a final move.

Veteran US investor Jim Rogers dismisses Bernanke as "just an Ivy League professor" who has set the US economy on a path it might never recover from with the economic patient now heading for the morgue. Rogers believes the US should not have bailed out big banks with government money; he also believes the Fed has set itself (and the US government) on the path to bankruptcy. He has been strident in taking it to US politicians over their combined failure to get their government's accounts back in order.