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Central Banks Are Paralyzed At The Zero Bound
Submitted by Alasdair Macleod via GoldMoney.com,
Though the Fed would deny it, it is clear from the minutes of the last Federal Open Market Committee (FOMC) meeting that a rise in interest rates has been put off indefinitely.
The subsequent rally in the price of gold and the sudden fall in the dollar tend to confirm this conclusion.
The Fed Funds Rate, which is the interest rate the Fed targets to set all other rates, has now been less than 0.25% for six and a quarter years, gradually declining from roughly 0.15% to about 0.10% today. It was set at a target range of between zero and 0.25% in December 2008.
According to the Policy Normalisation Principles and Plans issued last September, the FOMC will raise its target range for the Fed Funds Rate "primarily by adjusting the interest rate it pays on excess reserve balances" when the Fed normalises interest rates, "using reverse repurchase agreements to take money out of circulation to the degree necessary". The Fed also intends to reduce its holdings of securities and contract its balance sheet in the longer run.
If normalisation is the result of economic recovery we will be familiar with the playbook. Demand for money in the economy picks up, and instead of pyramiding bank credit on reserves held at the Fed, the Fed feeds back the excess reserves to the banks by selling government securities into the markets. The bear market in government bonds should be manageable because of underlying pension and insurance company demand coupled with a diminishing budget deficit. This is the long-understood theory behind withdrawing from deficit financing.
The reality has been very different as we all know. The Fed has to face the possibility that, for whatever reason, highly suppressed interest rates are not working, and an escape from the zero interest rate bound without economic recovery may have to be contemplated.
However, if the Fed raises the Fed Funds Rate in the absence of genuine economic recovery, there will be little or no expansion of bank credit to offset, and commercial banks will want to dump their Treasuries, not buy more from the Fed. There would be no offsets to cushion the unwinding of long bond positions. In other words the effect of even a small rise in the Fed Funds Rate could develop into a self-feeding rise in bond yields and substantial losses for the banks.
This is the context within which we should consider the Fed's decision to back off from raising the Fed Funds Rate mid-year. It leads to the conclusion that if zero interest rates haven't worked for six and a quarter years, monetary policy itself is in a cul-de-sac with no space to turn. And when we look at Japan and the Eurozone we see similar disappointments over the effectiveness of monetary policy.
Markets are unlikely to wait until the escape from the zero bound is put to the test. Before the investing public becomes aware of the full ramifications of the problem, more prescient bankers and fund managers will reposition their bond holdings, which brings us to gold.
Those of us that follow this market closely know that for the last three years at least Asian demand has led to large shifts of bullion from western capital markets towards Asia. The behaviour of the markets in London and New York already indicate that shortages of physical bullion are a delicate problem, and this is before markets wake up to the growing likelihood that the Fed cannot afford to see interest rates rise.
If interest rates cannot rise, then the dollar itself is ultimately exposed to loss of confidence in the foreign exchanges. The dawning realisation that after recent strength, the dollar is vulnerable after all can be expected to be reflected in a positive sentiment towards gold, which once under way could drive the price up dramatically due to the lack of available bullion.
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Bullish
Yellen - Yemen / Potato - Potata......
College should be free
Carry on....
Coeds should be free.
Then the demand for "college" would be more rational;)
This is the best summary of the pickle the fed is in and how they might get out of it, starts slow but well worth the read:
http://debtcrash.report/entry/history-and-introduction
When we shoot all the evil doers, then we can move forward. They are all in control and in power, this has to end ugly.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://goo.gl/9YqZBb
So, the "let the majority eat cake" monetary experiment continues... < shocker >
I'm just wondering what Yellen is going to say...just before the market closes...on a Friday. As much as we bad-mouth her we really don't know what she thinks and that's worrisome.....
Janet is more likely to raise a meeting attendee's cock than the interest rate.
ewwwww
So, what you're saying is....
betting on negative interest rates..., forevuh!
And that is highly unlikely
"In other words the effect of even a small rise in the Fed Funds Rate could develop into a self-feeding rise in bond yields and substantial losses for the banks."
haha ... what a dope
this moron has not a clue how the bond market works
I would bet my ENTIRE net worth that bond yields will stay neutral or go down if overnight rate raised in current enviroment
Agreed, but somehow, there is never a good time to stop sniffing glue.
Exactly. Forgetting about stock market, if the real economy is slowing down then how will raising rates cause higher inflation? "Improving labor markets" refers to falling unemployment rate (accounting bullshit) and Mcjobs.
I think Fed realizes they are fucked and it's time for a fiscal solution (to the coming Depression Ver 2.0). Still see Housing Vouchers good for $50,000 towards down payment, combined with Government guaranteed Mortgage Rates, killing Treasury market and US$ at the same time.
Whatever. With the collapse progressing in the rest of the world the Fraud can do nothing and still achieve the same effect as raising rates. This works as long as the almighty dollar remains the WRC.
Yellen speaking at 3:45PM today
Look at this fucking market since noon.
Market manipulators belong in prison.
Yellen, the Fed Governors and their bottle fed bank "advisory" committee all need prison time.
Real prison time. Not the Club Fed Pen.
u want to c the ultimate rigged and manipulated market???
i present exhibit A - http://www.kitco.com/charts/livesilver.html
nice how they get the charts to almost perfectly overlap - aint it???
completely crazy. i have dinner with my grandfather once a week. he fought in WWII and grew up thru the end of the depression. he and my grandmother (who passed away) always only invested in bonds and did very well. he cashed out recently and now just reflects back when you were incentivized to save safely. living in a ZIRP world, he said at our last dinner, "i feel bad for your generation - your all going to be working for the banks." he was referring to the ultra-lo rates you get for safe investments & the prospects of NIRP. he has always seen where this is all leading too & too this day, the man never spends a friggin penny more than he absolutely needs to.
these central banks are creating the dis-inflationary environment which will lead to deflation. when you don't give people a safe way to invest/save, they don't. thats obviously been their intention all-along because they just want people to spend every friggin $ they have. i find it fascinating that people like maxine waters (who say they are fighting for the "little guy") are more interested in restructuring loans and keeping rates lo which is a debt-based solution rather than promoting an income-based one which would help lift people out of poverty. even-if you just promote the saving of small amounts, it will add up & compound. but at these shit lo rates, people with such small amounts fall into the "why bother" trap. as time marches on, they never get ahead & have nothing to retire on. i heard today on CNBC that the average retirement account has $18,000 in it. i had that the 2nd year working at my company. really concerned about where this thing is heading. can only do the wrong thing for so long before something really bad happens.
The amount of confirmation bias on ZH is astounding. Getting the likes of goldmoney to contribute articles is not helping.
"I can haz more articles favorable to gold?"
Seriously, ZH, you might as well start begging people: Please buy gold. Now.
'Cause I'm sure you're doing this to help the little "folks".
'Cause I'm sure you're doing this to help the little "folks".
You must not know your history.
Every time Fed began QE the Bond market tanked and every time the Fed ended QE the Bond market rallied. I think the reason was simple asset allocation as investors front ran the Fed and dumped Bonds for stocks.
Assuming the Fed, instead of QE4, actually raises rates and initiates the mother of all stock market dumps then why wouldn't the same asset allocation occur with investors fleeing stocks and buying longer-dated Treasuries.
The Fed can do whatever it wants to short-term rates but if there is no additional QE then equities cannot go above 2100-ish (run the 2009-2014 Regression) and if there is no way up....
rates are where they are in spite of the Fed (goosing risk assets) not because of the Fed. If the Fed raises rates, conceding defeat, long-term rates will fall.
So let's recap, folks:
In short, we are all royally screwed. I would say "it's going to end soon" but the TPTB have done a good job (credit where credit is due) of keeping this going, but there's only so much they can do. It's going to get to a point where it becomes beyond their control. But the best way (I feel) of demonstrating how close we are to the edge is this.....
At no point in huma history have stock markets and bond markets been at these highs. We are now in unchartered territory. Yet, consumer confidence & business confidence indices are at deep lows and debt is at an all time high. Even the most basic economics student will tell you, something is fundamentally wrong and that something has to change, in order for one metric to be in line with the others. Now which scenario is more likely?
1. Debts (which are at all time highs) are suddenly and quickly paid off, which raised business and consumer confidences to a level which matches the stock and bond markets. (Forget about what damage paying debts off will do the banking sector! Let's keep this simple!)
or 2. The stock and bond markets crash to a level which matches the business & consumer indices and the debt levels?
I don't know about you, but I'll just keep stacking while I'll mull that one over....
Hey Chuck I'm with you on the stacking...
Hey, the more gold and silver we buy, the more that gets taken off the market and the more that gets taken off the market, the more fragile the COMEX becomes......
Don't you just love hobbies that have funny consequences....? ;O)
Keep stacking, my friend....
Chuck -
every work you have spoken is dead on...
and yes - the Shinny will continue to be squirred sway...
stupid MoneyChangers.
a rise in rates that the Fed could influence up would drive the USD up faster and crater the Euro in the process (Europe NIRP vs US positive rates)
a rising USD is going to crush Q1 and pulverize guidance - and yellen knows it - so he won't be trying to raise rates anytime soon.
The US military are the equalizer, the backing of the dollar. For now.
I noticed nothing was really said about government deficit spending which give the Fed and the banks the ability to purchase US Treasury instruments. IF the government wasn't deficit spending and thus flooding the market with debt obligations (US bonds), then the Fed and the banks would have no choice but to buy corporate bonds, i.e. invest in some productive enterprise that produces wealth. In fact, the Fed would not be able to fix the bond interest rates at all since there would be no bonds to be had for leverage. People seem to forget that without the government issuing debt obligations (bonds), excess money in the system, i.e. profits and savings would have to go into something productive creating wealth which in turn supports jobs.
The real issue here is the Fed by buying US Treasuries in order to manipulate interest rates encourages deficit spending due to the political demand for cheap rates to not blow up the budget, a vicious cycle. NO DEFICIT SPENDING = NO FED CONTROL OF INTEREST RATES, I.E. A MARKET DRIVEN RATE SIGNAL.
The only effective non destructive means to end ZIRP is for the government to stop deficit spending and then go into surplus for the next 20 to 30 years to pay off the $18 trillion outstanding debt.
"The only effective non destructive means to end ZIRP is for the government to stop deficit spending and then go into surplus for the next 20 to 30 years to pay off the $18 trillion outstanding debt. "
IT IS NOT DEBT. IT IS FEUDALISM.
DEBT IS DESIGNED TO BE PAID OFF. US GOV'T BONDS ARE NOT DESIGNED TO BE PAID OFF.
US GOV'T BONDS ARE PERPETUAL INCOME STREAMS CREATED VIA THE FEDERAL SALE OR 'PRIVATIZATION' OF TAXPAYERS.
THE BANKING SYSTEM IS A .GOV SANCTIONED TAXPAYER PRIVATIZATION SCHEME.
THE INTEREST IS NEVER CREATED WHEN LOANS ARE MADE. INTEREST CAN ONLY BE PAID VIA CEDING OF REAL ASSETS AT ROLL OR TERM. THE REAL ASSETS BEING CEDED TO PAY THE INTEREST DEFICIENCIES BUILT INTO THE SYSTEM ARE TAXPAYERS.
Well yes, debt is feudalism because US bonds are merely dollar bills with interest and as a result the issuance of more debt or printing dollars dilutes the existing supply dollars, which in turn devalues the dollars in everyone's hands. This is why deficit spending has to stop and the money supply shrunk by paying down on the outstanding national debt.
But then don't ever expect liberals to allow the debt to be paid off, they have a vested interest in making serfs of the population. You can't be a lord if there are no serfs.
Not enough interest to keep me interested.
If they want to start raising interest rates, find. 0.01% per month for 4 years will raise it by 0.48% Minimal shock to the economy, but it will make the debt service start to be felt by politicians and maybe, just maybe, they'll be forced to do something.
Spécialité de la maison
Time for the Kelley Monetary Policy Rule
http://michaelekelley.com/2015/03/27/the-kelley-monetary-policy-rule/
QE and higher rates simultaneously.
Thanks
Zero interest rates, the rates that entities with access to central bank money, and we know who they are, have a liscense to print money, as any jackass can find an asset class to play the spread on. After all, any spread above zero is a money maker.
Americans, ask yourselves how much zero interest rate money can you borrow? Can you say, take on a billion dollars at zero interest? Can you then play the market with it? But bonds with it? Or are YOU forced to borrow at rates set by bankers? That is what I thought, you pay bank rates, while the big boys have a pipeline of billions at zero interest. You are on the wrong side of the interest rate apartheid wall. The Feds friends pile up untold billions in risk free spreads, while you work at a job where the boss wants more work and wants you to have less pay. That is the trend for over 20 years. If you work, it is longer and harder for less. If you save, you have had all your interst stolen now for nearly a decade! Theft and demands for lower compensation. While the 1% have never made as much, and whose taxes are lower than since the 1920s. Capital gains taxes are held especially low, while income taxes for middle level earners are at near record rates. Welcome to Obama land, the same as Bush land. The same as it will be when Hillary Cliton in president, or her challanger Jeb Bush. You chose, anyway you look at it, you lose.
Criminal Bitch