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Peter Schiff On The Absurdity Of The Fed Losing Patience
Submitted by Peter Schif via Euro Pacific Capital,
I have always argued that quantitative easing and zero percent interest rates were misguided policies to combat economic weakness. But as the years went on, misguided turned into irresponsible, which led to ridiculous, and then turned into dangerous. But lately, the only word that comes to mind is "surreal." How should we react when central bankers begin to speak like Willie Wonka?
Contained in the latest release of the Minutes of the Federal Reserve's Open Market Committee (Jan. 27-28, 2015) was a lively discussion of how to say something without anyone understanding what is being said. Although I have been critical of the Fed for many years, I never imagined that it would provide me with material that bordered on the metaphysical.
As Fed policies have become ever more critical to our economic health and stock market performance (see our 2015 Outlook piece in our latest newsletter), the degree to which investors and journalists dissect every public statement and utterance by Fed officials has increased remarkably. At present, one of the biggest points of contention is to find the true meaning and significance of the word "patient."
Last year, as market watchers grew nervous with the Fed's withdrawal of its quantitative easing purchases, many began to wonder how long it would be, after the program came to an end, for the Fed to actually raise interest rates, which had remained at zero since 2008. After all, this would shift the bank into a second, potentially more consequential, phase of monetary tightening. Investors wanted to know what to expect.
Initially the Fed let market participants know that it would hold rates at zero for a "considerable time" after the end of QE (9/13/12 press release), thereby creating a buffer zone between the end of QE and the beginning of rate increases. But, after a while, this also became too amorphous and static for investors who crave actionable information. So in December of 2014, in a bid to increase "transparency" (which is the central banking buzzword for "no surprises"), and to signal that the day of tightening had moved closer, the Fed replaced "considerable time" with the word "patient." But this only deepened the mystery. Investors began to wonder what "patient" actually meant to the Fed. With potential fortunes riding on every word, the discussion was anything but academic.
When pressed for an answer at a Fed press conference, Yellen explained that the word "patient" in the FOMC statement indicated that it would be unlikely that the Fed would raise rates for at least "a couple" of meetings. She then conceded that "a couple" could be interpreted as "two." Since the FOMC meets every six weeks, that seems to mean that a rate hike would not happen for at least three months after the word "patient" is removed from its statements. But she was also careful to say that removal of the word "patient" does not necessarily mean that the Fed would raise rates after two meetings, just that it's possible. But this much transparency may have become too much for the Fed to handle.
With the economy now clearly losing steam, based on the drop in GDP from 3rd to 4th quarters, and general macro data coming in very weak (Zero Hedge, 2/18/15), I believe the Fed wants desperately to move those goalposts. But after a series of seemingly strong jobs reports, culminating with a strong 295,000 jobs in February, the market expects that "patient" will soon disappear from the statement. The Fed wants to comply, thereby signaling that everything is fine. But at the same time it doesn't want the markets to conclude that rate hikes are imminent when it does.
In other words, they are searching for a way to drop the word "patient" without communicating a loss of patience. What? This is like a driver telling other drivers that she plans on engaging her turn signal before making a left, but then wonders how to hit the blinker without actually creating an expectation that a turn is imminent. This seems to be a question for psychologists not bankers. Perhaps it is looking for a new word to replace "patient"? Something that implies a slightly less patient outlook, but that certainly does not imply imminence. "Casual" or "nonchalance" may fit the bill. How would the markets react to a "nonchalant" Fed? Time for a focus group.
The recently released Minutes of the January 27-28 FOMC Meeting frames the difficulty:
"Many participants regarded dropping the "patient" language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates. As a result, some expressed the concern that financial markets might overreact, resulting in undesirably tight financial conditions."
Translated into English this means, "We hope the markets don't actually believe what we tell them." The Minutes continue:
"A number of participants noted that while forward guidance had been a very useful tool under the extraordinary conditions of recent years, as the start of normalization approaches, there would be limits to the specificity that the Committee could provide about its timing."
To me this translates as "Transparency was great while we were loosening policy, or doing nothing, but it isn't useful now that the markets expect us to tighten." If you believe as I do, that the Fed has no intention of tightening anytime soon, its sudden aversion to clarity is understandable. Not surprisingly, the Committee appears to be in favor of shifting to a "data dependent" stance:
"...it was suggested that the Committee should communicate clearly that policy decisions will be data dependent, and that unanticipated economic developments could therefore warrant a path of the federal funds rate different from that currently expected by investors or policymakers."
Of course the Fed won't actually define exactly what type of data movements will translate into what specific policy actions. In that sense, a "data dependent" policy stance puts the Fed back into a "goalpost-free" environment where no one knows what it will do or when it will do it.
To underscore the absurdity of the situation, Chairman Yellen, at her semi-annual Senate testimony in February, offered this "full-throated" warning about pending policy normalization, saying that the Fed "will at some point begin considering an increase in the target range for the federal funds rate." So this means that after some unspecified time of not even thinking about rate increases, the Fed will "begin" the process of getting itself to the point where it may "consider" (which is in itself an open-ended deliberation) an increase in its rate target (which does not even in itself imply an actual increase in rates). Yet despite this squishy language, the lead front page article on February 24th in the Wall Street Journal (that contained that quote), ran under the bold headline "Yellen Puts Fed on Path to Lift Rates." Leave it to the media to carry the water that the Fed refuses to pick up.
So are we expected to believe that the Fed hasn't even begun considering rate increases yet? Really? Isn't that the biggest, most urgent, issue before it? The Fed is a central bank, what else is it supposed to consider? This is like a 16-year old boy saying that "at some point in the future I may begin thinking about girls." Till then, should we expect him to think solely about homework and household chores?
Fed officials have warned that they are concerned about raising rates too quickly. Perhaps that fear may have been plausible a few years ago, before unemployment plummeted and the stock market soared. But how would a 25 basis point increase in rates seriously slow an economy that most people believe has fully recovered? And if the Fed is concerned now, why would it not be concerned next year? If anything, the longer it waits, the more vulnerable the recovery will be to higher rates.
The business cycle tells us that recoveries do lose momentum over time. The current recovery is already five years old, and is, statistically speaking, already well past its prime. And since low rates encourage the economy to take on more debt, the longer the Fed waits to raise rates, the more debt we will have when it does. This means that the debt will be more costly to service when rates rise, which will throw even more cold water on the "recovery."
The Fed's real predicament is not how to raise rates, but how to talk about raising interest rates without ever having to actually raise them. If we had a real recovery, the Fed would not need to couch its language so delicately. It would have just pulled the trigger already. But when its communications and its intentions are different, credibility becomes a very delicate asset.
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Once again he is correct and he will be vindicated.
Perhaps bonds are being sold and the market is raising rates - in which case look out.
He may be correct in principle but I don't know if I would trade based on beliefs of how things should be. If you predict the collapse of the US dollar 20 years or more before it happens, are you ahead? Too much bias. If the system is corrupt, you don't change it by shorting it and getting cremated by the corrupt system time and time again.
Agreed. Schiff sees what the idiot sheep on Wall Street fail to see. It's funny when Schiff rips on Fed/ recovery cheerleaders at CNBC Steve Liesman and Ron Insana.
CNBC had better be careful about bringing Schiff back on. He has appeared more coherent, non hysterical and quietly self confident than ever. On his last interview on Greg Hunter's USA Watchdog, he looked as cool, calm and articuate as I have ever seen him.
https://www.youtube.com/watch?v=UBzZ_rZ7lC8
Liesman and Insana...hmm...did those names come from their folks, or were they assigned by CNBC?
article posted today...
It follows the Fed's thinking (logic?) and shows the economic slowdown coming simply from the domestic public becoming the primary buyer of Treasury's...
http://econimica.blogspot.com/2015/03/treasury-buying-pyramid-ponzi-or-gdp.html
+1000. Excellent read Ham-bone. thank you.
Exclnt. point in Hambone, that Schiff misses. You cannot base an opinion if you do not know the truth. Did the FRB stop QE ? Most likely no, they are still buying T's and MBS daily, as well pushing Japan QE.
So they may 'Say' they raise rates to the public, and then behind the scenes major banks sit at ZIRP.
Media is full of lies from these bankers, why belabor this discussion what they will and will not do ? They will do what they want anyways and tell us otherwise. Losing game.
2) A no win scenario of the domestic public forced to buy the majority of Treasury debt at low rates (bankrupting the public due to the extremely low yields) or buying Treasury's at high rates (bankrupting the federal government in interest payments). The retraction of domestically available cash to purchase Treasury's would detract 5% from GDP and crush economic activity.
BHO proposed this with MyRA's. Not politically possible right now.
So, they are currently siphoning Japanese pensions. The end of QE turned the international monetary tide into US bonds. See higher dollar.
The proof of him being correct is in the observation of what the FED is talking about with regard to raising rates. A fucking .25% rate raise isn't even worth mentioning for christ's sake! Yet here we are, watching the FED agonize over raising the rate a fucking quarter point and acting like if they do well hip hip hooray, the emergency is over and the economy is sound! If that isn't proof that they are up against the end of the road then nothing is.
When rates are sitting at the current levels, a quarter point is HUGE. To make it a simple example...
If Interest Rates are at 1% and rates are raised to 1.25% then you are talking about a full 25% in the yield from the note.
Thus people will dump every single bond which is paying 1%, en masse, at once, that is paying 1% and then purchase those that are garnering 1.25%
And that is what will crash the Bond Market.
If I were heading the Fed then I would begin increasing Interest Rates in 0.02% to 0.05% increments for the sake of Bond Market stability. That would be rational...and patient.
... raise rates ... yeh, right.
Janet Yellen. She's quite a guy.
janet is the real thing. a real guy. and can you imagine, it's was probably tough enough for her to get laid as a woman.
geez, who would have gone anywhere near that hag, at any age. ignoring the rotten personality. oh. right. greenspan and bernake.
I suspect if liquidity continues to dry up, money will become increasingly more expensive and the laws of nature (market based interest rates) will overwhelm the FED. In fact I'm fairly certain that's what Chairmanwoman Yellen is hoping for.
By "hoping for" you mean "trying desperately to avoid," right? If not, you can resume Play-doh hour.
I think I will make a Screwdriver,maybe a double,or a triple..depends on my patience...
Allen St..... I mean Peter has some points, but I'd never never send money to his offshore bank. Looks hokey to me.
Peter has more than 'some points'.
However, I wouldn't send money to his bank - or anyone's bank, for that matter. The whole point of gold ownership, which is one of the primary messages Peter brings, is wealth stored outside the system.
It's got nothing to do with the economy.It's the gigantic size of Government debt at all levels and the fact that no Government at any level can service the debt at higher interest rates.They don't have the tax base to do it.The low paying jobs being created can't service the debt.Obuma will run her up to 20 trillion by the time the loser is out.State,County,Cities,towns,everybody is just about bust.
Exactly right. If interest rates even went back to the 50 year averages, it's about a 4.5% increase in rates. On what will soon be a $20 trillion nominal debt (and an order of magnitude higher on the actual debt), that's $900 billion they have to find. No way. There are four options as I see it:
1. ZIRP or NIRP forever
2. Monetize the debt and risk ridiculous levels of inflation
3. Debt jubilee and piss off every bondholder in the universe and unleash hellacious unintended consequences
4. Pick a fight with every foreign bondholder and write off the debt because "they're bad".
1% increase is $180B in interest. Ya think they are gonna raise?
What most people fail to realize about the interest on FED held treasury bonds is that the $180B per 1% you speak of is correct however the FED has to pay that 'profit' right back to the treasury under their mandate. So government gets to pay zero percent on their FED held bonds. So that being said, if the foreign UST bills become too expensive for the U.S. Gov they will turnaround and force the FED to bail them out and buy up those bonds. This would be massive QE that would force US dollars into the system and ultimately inflate away their debt through undoubtedly a hyperinflation event. So if the FED raises rates the Dollar is doomed and the debt disappears. Final reset!
Good point and likely scenario. There is no other way out than default or devalue(inflate). Both are bad
+100 End of story. Oh yeah - and END THE FUCKING FED.
My dream is someone locks an exploding bomb around Yellens neck. Tell her she has 2:58 seconds to tell the whole world the TRUTH. ....after 3 minutes. .......streamers come out.
What about that automated wire snare thingy from The Counselor. That would be glorious.
The Hitchhiker - foot on the clutch scene. Beautifully morbid.
"How should we react when central bankers begin to speak like Willie Wonka?"
By hanging them? Uh, like, duh!
Bob, you're not going to kill anyone, far from it. I understand you're angry, but it's just bravado.
Allow me to disabuse you.
What you're actually going to do is go eat that leftover lasagna, watch a little light night TV, maybe fart a couple of times and drift off to sleep.
Yep, the Fed can't raise rates. We have an $18 TRILLION debt that is growing fast. We won't be able to afford payments on the debt with normal interest rates.
I have no patience for FedSpeak. Hang the Fed.
Bob, the only thing you'll be hanging up is your bathrobe (see similar response, above).
Tomorrow you'll write again to vent how you're fed up to h-e-r-e with the Fed.
Lather, rinse, repeat.
I've been watching this evil fed long enough to know tightening and patience are off the table. With stocks dropping and the dollar on fire it will soon be time to fire up the presses for QE4. They will never raise rates.
I've been watching this evil fed long enough to know tightening and patience are off the table. With stocks dropping and the dollar on fire it will soon be time to fire up the presses for QE4. They will never raise rates.
You can say that again.
You may well be right.
See, this is what happens when you use two devices.
they will never raise rates voluntarily. they can't. Mr market will force it one day but it won't be cuntface yellen's idea
patience is a perfect fedspeak word. it says nothing.
The great jobs report is just there for another BTFD.
ZIRP and NIRP for a very protracted period of time; no rate increases also for a very protracted period, and eventually... QE4. Duh!!
With different factions of the "power elite" battling for domination; clueless academics and attorneys holding government and head of state positions; bankers and corporations interfering in government; Marxism and Fascism as the "isms" du jour; the basic principles of governing and economics long ago flushed down the toilet and forgotten; false data re: money, economics and business rampant; and so on... what do you expect?
It's called lying. And they are experts at it.
The problem with being right in a world where everything's wrong is that the messenger tends to be:
1) ignored by MSM
2) then laughed at by 'the smartest guys' on MSM
3) then challenged by the professional Muppet skinners in MSM
4) then selectively quoted to discredit by MSM
5) finally, find themselves on doomed private plane with 'maintainence issues' as reported by MSM
Funny - that was good
The Fed doesn't know how to help the economy truly recover but they do know that what passes as a recovery will quickly disappear without ultra-low interest rates. But the extreme money printing in Japan and Europe is causing a runaway dollar that will kill the recovery anyway. The Fed is trapped and they know it. They are just hoping for a miracle to avoid recession, at this point, because their bag of tricks is empty.
THIS WILL END BADLY!!!
The moment that you graduate as a lawyer or become employed anywhere in the financial system you should give up your right to run for any political office or work for any arm of government.
Tighten, you fucking bitch!!! I fucking dare yoU!!!! Put us all out of our misery!!!!
Something depends on what the definition of the words used is.
But, what?
Carry on!
Rofl!! This article is so well written!!! The idiots have put themselves into a corner here. Fabricating the job numbers and rosy rosy economy while not being able to raise rates...amazing! Stupid fucks! At some point this shit show is gonna come crashing down!
Interest rates are kept low intentionally by the FED to support BIG government spending. They will never substantially raise rates.
From what we are all seeing, it truely looks as though the basic economic mechanism is totally broken. The fed has lost half of its ability. The half it has list is the ability to kick start our economy by lowering rates. This leaves the fed with only a one sided capability, to raise rates. That is the tool used to "cool" down an economy & slow down inflation. If we look at this like driving a car and the gas peddle is lowering rates, the brake is raising rates, & the transmission is the actual economy, the fed pretty much has the gas peddle floored but the transmission is totally slipping & burning up.
This is where I have a problem...if the fed raises rates, won't that cause DX to go up? Isn't that a double edged sword for them? Not only increasing the servicing cost of the debt but also increasing the value of the debt? I do believe raising rates typically causes the underlying currency to rise. Is it somehow the opposite case here with things being so fucked up?
Trading where a market is believed to go is much more dangerous than trading a market where it is believed to react...at least that's what I personally find for myself.