Bankers To Fed: Stop Riding The Asset Bubble And Raise Rates Already

Tyler Durden's picture

Submitted by Patrick Watson via MauldinEconomics.com,

The stakes were high at last September’s Federal Open Market Committee (FOMC) meeting. Federal Reserve officials had hinted all year that a rate hike was coming. Traders assumed it would come at a quarter-end meeting, coinciding with one of Janet Yellen’s news conferences. If so, it would be the Fed’s last chance until December.

After much suspense, the FOMC again sat on their hands.

But the September vote to do nothing wasn’t unanimous. Three hawkish committee members dissented—a first in Yellen’s term as Fed chair.

What no one outside the Fed knew at the time: Two weeks earlier, the Fed’s Board of Governors had held an unannounced, closed-door meeting with top US bankers, including the heads of Citigroup (C), Wells Fargo (WFC), BB&T Corp (BBT), and Northern Trust (NTRS).

Echoing the FOMC dissents later that month, the bank CEOs asked the board to normalize rates and stop “riding the asset bubble being generated by the easy-money policies around the globe.”

That’s unusually direct language by Fed standards, but the way it stayed hidden ahead of the FOMC meeting is stranger still. It raises serious questions about the Yellen Fed’s commitment to transparency as well as its struggle to reach policy consensus.


Federal Reserve Board meeting, June 3, 2016. Photo: Federal Reserve

The Forgotten Council

The 1913 Federal Reserve Act created a system of regional reserve banks balanced by a politically appointed Board of Governors in Washington.

It also mandated a link between the two, called the Federal Advisory Council (FAC). Each of the 12 Fed districts appoints a representative to the council, which then meets with the Board of Governors four times a year.

Those meetings have been happening for over a century, yet few people outside the Fed knew about them. For decades, the Fed disclosed very little.

In 2013, Bloomberg News used the Freedom of Information Act (FOIA) to obtain official records of Federal Advisory Council meetings. Now you can read them on the Fed’s web site.

Note that this was not a voluntary disclosure. If not for FOIA, we would all still be in the dark, as the Fed evidently wants. Even now, the public records omit important details, like who are the group’s officers, attendees of each meeting, votes taken, and future meeting dates.

They are still useful, though. I’ve been reading the FAC summaries since 2013 and find them much more informative than the better-known Beige Book reports.

The September 7 meeting record was especially interesting. Consider this from a section on persistently low interest rates and their impact on bank profitability.

It may be a prudent time to adjust policy thinking to shift the balance from stimulus through lower rates to encouraging investment activity through investment returns. Shifting the policy stance to a normalization posture that steadily moves to higher rates could increase confidence and reestablish the normal relationship among savers and borrowers.

If rate normalization happens in a steady and more predictable approach, the economy can incorporate this change in rates and psychology and make investment decisions based on the best allocation of capital to productive sources versus riding the asset bubble being generated by the easy-money policies around the globe.

Remember who said this: Top bankers, talking to the Fed’s Board of Governors, two weeks before a key FOMC meeting. The bankers clearly wanted higher rates as soon as possible.

The Federal Reserve Act specifically empowers the council to make recommendations to the board, but why say it so forcefully? This is the Fed, where everything is slow, measured, and deliberate. Terms like “asset bubble” and “easy money” aren’t in their normal vocabulary.

I asked a former Federal Reserve official, familiar with internal deliberations, what to make of this language.

The answer: This is not normal. Whoever said it wanted to make a point.

So, it looks like the Federal Advisory Council was trying to shake up the Board of Governors. The council wanted higher rates and said so in plain, unmistakable terms.

The board doesn’t have to agree, and it didn’t. All five governors, including Yellen, voted not to raise rates at the September 21 FOMC meeting.

Convenient Delay

All this stayed unknown to the media or public due to an unusual deviation from Federal Reserve practice. The FAC normally posts records of its meetings a week after they occur. As of September 7, it even said so on its web page.

You can see it in this screen shot taken that day.

But as we know, this meeting wasn’t typical.

Instead of posting the September 7 meeting record a week later (on September 14), the Fed released nothing until September 23. Here’s what the page looked like then.

The Fed staff added a line linking to the September 7 record. They also removed the line that had previously said, “Records are typically posted within a week after the FAC meeting.”

Through another source, I confirmed that this text disappeared from federalreserve.gov sometime between noon on September 7 and 5:00 PM on September 8—right after the FAC meeting occurred.

This suggests someone decided to delay the September 7 record release beyond the “typical” one week.

Who made that decision is unclear, but here’s what we know.

  • Instead of the usual one week, the FAC record didn’t appear until 16 days after the September 7 meeting.
  • Someone removed language that would have highlighted this delay on September 7 or September 8.


Photo: Getty Images

A Fed spokeswoman told me they try to get the FAC records out within a week but don’t always make it. She could not comment on September’s unusual delay or the web site changes.

Since the Fed won’t explain, we can only speculate. Combine what we know these with two other facts:

  1. The delayed record revealed major disagreement between the FAC members and the Board of Governors on interest rate policy.
  1. The delay hid this disagreement from the public until after the FOMC decided not to raise rates.

Strange, yes? Here’s the sequence of events again.

  • Sept. 7: FAC meets, asks FOMC to raise interest rates
  • Sept. 8: One-week publication note disappears from FAC web page
  • Sept. 14: FAC meeting record not released on schedule
  • Sept. 21: FOMC announces no change to interest rates
  • Sept. 23: FAC releases FAC meeting record 11 days later than normal

By the way, the “within a week” sentence is still missing from the web site now, three months later. That suggests the delay was more than a one-time exception.

More mysteries could be hiding in the 20-page September meeting record. I invite you to review the document and contact me with other ideas.

A Question for Mrs. Yellen

On one level, this is just normal bureaucratic behavior. Government officials don’t like being questioned. Neither do bank CEOs.

But this is not simply another alphabet agency. It’s the Federal Reserve, the world’s most important central bank, whose chair has promised greater transparency on matters of public interest.

What else are they hiding?

Well, if the FAC followed custom, it met on the first Friday of this month, December 2. But as of now, they won’t even confirm a meeting occurred.

On December 1, I called the Fed’s Public Affairs Office and asked if the FAC was meeting the next day.

The answer, after a brief pause: “It’s not on our public schedule.” Nicely vague.

I called again on Monday, December 12, and asked the same question: Has the FAC met this month? Again, they would not confirm whether the FAC had met and advised me to watch the web site. 

So, it looks like we won’t know any more until the Fed feels like telling us. Will the FAC record again appear after the FOMC meeting?

As I said last week, the Federal Reserve Board has two vacancies that President Trump can fill as soon as he takes office. Maybe they can help Yellen pull back the curtain.

Riding the Asset Bubble

One more thing…

We know the bankers on the Federal Advisory Council saw an “asset bubble” as of September 7. Yet their own stocks have skyrocketed since then.

For example, Comerica (CMA) shot up 46.4% and Regions Financial (RF) jumped 44.2% through December 12, including dividends. Most of the others were up 25% or more.

If the bank leaders saw an asset bubble even before this rally, what do they call it now?

*  *  *

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Truther's picture

A bunch of lunatics. Fuck the Fed.

nope-1004's picture

Oh c'mon.  This source of this story is an insider who fabricated it.  The bankers, who are technically insolvent and will literally go bankrupt if rates rise, are telling their divine leader to raise rates?

Pffft.  The only constant among the money hoarders is they lie.

UndergroundPost's picture

 

<-- FED raises

<-- FED is an abomination

kliguy38's picture

Bankers to FED......raise those rates so we can short these dumbfochs to hell and steal another Trillion or two

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) kliguy38 Dec 14, 2016 11:26 AM

Holy shit!... The bankers are asking the Fed to do the right thing. To do what should have been done many years ago.

What gives?

Pairadimes's picture

Negative interest rates are an obscenity. If economic productivity is any value greater than zero, then there is a time value to money. The presence of NIRP is proof of fraud.

auricle's picture

It may be a prudent time to adjust policy thinking to shift the balance from stimulus through lower rates to encouraging investment activity through investment returns.

Deflate assets to free up consumer capital, to create the aggregate demand needed to produce the investment returns. If only we had been building a productive class the past 8 years instead of being fed a steady diet of waiter and bartender jobs.

 

JRobby's picture

Yup, they are prepared for the new cycle of gouging fees when thousands of loans go into "technical default" on INTEREST COVERAGE and DEBT / EBITDA ratios.

AAHHHHHHGGGG!!!!!

They get you coming and going

SWRichmond's picture

So Trump was elected to blow a "hope" bubble into the economy, to allow the Fed to "normalize" rates and regain some credibility, and then Trump will take the fallfor it if/when the economy collapses?

Deplorable

LawsofPhysics's picture

Please, these bankers are "the Fed"..

fuck em, the entire planet is insolvent!!!

auricle's picture

Yup, they are prepared for the new cycle of gouging fees when thousands of loans go into "technical default" on INTEREST COVERAGE and DEBT / EBITDA ratios.

 

Wouldn't that start a selling panic (ie lower prices beget lower prices) and crash asset valuations? Can they make that up in late fee and interest charges? I think the transition is going to be a lot uglier and bank stocks and the Russell2k will be hit hard.  

Truther's picture

"Pffft.  The only constant among the money hoarders is they lie."

Yep. Since 1913. And the sheeple kept believing.

JRobby's picture

"You lie, cheat and steal

Lie, cheat and steal

Still I tolerate you"

(Maynard)

MEFOBILLS's picture

Speaking of lying, cheating and stealing.

It is not the interest rate on money (actually credit).  It is how credit is directed.  If credit is directed at finance, especially finanical paper, this blows finance bubbles.

For example, financing the buying and selling of an existing house, does not create anything new.  It takes in-place assets and transfers it from one party to another.  This buying and selling of financial assets using new credit is empty calories that push prices.  It is heat and waste.

There have been many economies in the past that directed credit ONLY at real productivity channels.  Japan up until the mid 80's used credit guidance windows, where bank credit was channeled into production sectors - mostly manufacturing.  In Japan during this period, to buy a house or do some sort of finance activity, you had to use existing stock of money.  Canada did the same thing from 1938 to 1974 with their sovereign like money system.  Canada had "trusts" of pooled savings, where a person could borrow to buy a house.  The U.S. used to have savings and loans for this activity.   Frederic Lists economy under the Kaiser used directed credit scheme.   Guided credit worked.  

It is only hypnotized modern humans who seem to think that credit should be used for consumption, transaction, savings, and to also vector toward finance.  Who funded modern humans into their hypnotic trance?  It was usury gained in private banking sector, that then vectors into buying up university economic chairs, and also funds the usurpation of government.  Chicago School neoliberalism is a prime example of this hypnotism in action.

If credit is channeled into production modes, then the economy booms, then interest rates rise as a lagging indicator.  If the economy starts in production decline, then interest rates decline.  Interest rates follow the economy as a lagging indicator, sometimes by as much as a year  Doubt this?  See Professor Richard Werners data on this subject. (Youtube videos or books are available.)

The economists at FED are not competent, and worse have  a "trained" world view that does not comport to reality.

LawsofPhysics's picture

Good comment, with only one modification regarding risk.

Do you believe that economies can grow forever and ever in a biosphere with finite resources? Do NOT make me pay for risks that YOU profitted from, but that also FAILED.  Cannot have it both ways.

MEFOBILLS's picture

Growth is just a convenient term for growing/making things.  There is no growth, only conversion from one form to another.

Energy comes in from the sun, and humans use this energy and convert the earth.  Money is part of this conversion process.

Risk should be assessed at the moment a debt/credit contract is signed.  Rents should be taxed.  Monetary debts that grow exponentially and then make claims should be canceled.

There is only one way, and that is a lawful approach to money.  

Ancient Venitians had a good system, whereby risk was assigned to debtor or creditor depending on the venture.  In today's system, all the risk is typically assigned to the debtor - which is fraudulent.  For example, the banker will harvest the population during debt depressions.  Banker socializes his risk, so it is heads I win, tails you lose.

I get that you are frustrated.  There are proper ways to do things, but the average hairless rent seeking monkey will probably have to be forced.  Man is a rent seeking animal.

LawsofPhysics's picture

Please. My family has been farming for three generations, debt free.

 

Fuck the monkeys, let evolution work already, will come to this eventually.

MEFOBILLS's picture

The money your family spends, and collects, and saves was because somebody else went into debt.  (Because we have a debt system.)

You depend on other monkeys to make your tractor and provide you with goods and services.  You depend on them to buy your produce, otherwise you will have to barter.

So, a component of the money supply must be debt free money, so you can trade and have savings.   This type of money is not making exponential claims "for growth."

The evolution you speak of will kill off the higher monkeys.  For example, when Russia was converted to extraction economy during Yeltsin years, they went into demographic decline.  K type people stopped having babies.  R types don't give a damn, they will breed no matter what, then squat on your land.

There are a lot more moving parts to the machine than you are considering.

Jeffersonian Liberal's picture

Translation:

"We rode the "pump" to all-time highs and we've made lots and lots of money. Now we are ready to short the market and make even more money on the "dump" side of this fraud. Trump was elected. It's time to crash the economy so that we can blame the crash on Capitalism and so that we can reap the monetary "rewards" of the biggest "pump and dump" in the history of finance."

Jack&#039;s Raging Bile Duct's picture

My exact thoughts. Well said. After all, Bankers hate nothing more than suffering first access to free money.

SoDamnMad's picture

Come on, Obama met Janet in the summer and told her she could not raise rates because things had to look good for this Democratic president in order to have Hillary slide into the presidency behind him.

Pizzagate (had to say it)

Bill of Rights's picture

And there it is no rate hikes.

Robert Trip's picture

Where did that 21 trillion go?

It sure didn't go into the United States.

Cynicles's picture

Money money everywhere and not a buck to spend

  Money money everywhere, it used to be my friend

Madcow's picture

Sorry - but its time to pull the plug on Grannie. 

 

ebworthen's picture

C'mon Janet, 6%, you can do it!

That would normalize things.

Are ya' yellow!?!?

Consuelo's picture

 

 

"Traders assumed it would come at a quarter-end meeting, coinciding with one of Janet Yellen’s Jews conferences"


Is my dyslexia acting up again...?  

Yen Cross's picture

   The Squid and XLF are certainly priced to PERFECTION.

Malus's picture

Bankers to the Fed? One and the same. We are being played.....

fbazzrea's picture

well, yes and no, imo.

this is more like the small fry complaining to the grand poopaw that the big fish are getting all the worms.

but we are being played----like the Fed and TBTF banks are not one and the same.

jail the banksters. end the Fed. 

return to sovereign currencies--silver and gold.

if you want to transact with IOUs and settle up monthly with real money, that's fine. whatever floats your boat.

but time for real money to enter the economy and let the debt-based paper die.

Eagle Keeper's picture

The current administration won't let the FED do anything to allow the economy to normalize, that is until the Trump administration comes in.

Robert Trip's picture

Head winds, tail winds, helicopters.

It's the same shit from these people every time.

Why doesn't someone ask them where that $21 trillion went?

That's a lot of money.

fbazzrea's picture

ask Papa Shrub... he knows.

Yen Cross's picture

 This stupid fucking shitshow is going to be played out as stagflation. The only demand I see is through devaluation.

 What fucking part of overcapacity don't banksters see? E/M is going to get crushed through higher borrowing costs and lack of demand from buyers.

People are saving in non traditional ways. They don't trust banks.

FreeShitter's picture

They are not yet done destroying whats left of the middle class

NugginFuts's picture

What non-traditional savings are you referring to? Stackers and hackers? (phyzz and bit?)

Waiting for some good gold dips post-FOMC. Cash in hand, baby!

Caloot's picture

Yea, a quarter at a time.   The sweet spot. Hahaha

centerline's picture

The Fed really does not have any power.  It is all jawboning.  As long as people believe they actually have any sort of control over anything, it works!  Pure fucking illusion. 

Ultimately, the politicians are to blame and are also the stooges.  Got to watch how they get set up.  The Fed is bound to chuck them under the bus when they sense things going south.  My guess is that it plays out to a point where DC will demand Fed changes once facing things going south (fingerprints on the lever) and final smoke and mirrors act will begin.  As if the Fed can change something to avoid a shit storm.  Rather, it will be the final lie... that the Fed actually caused it - but by the meddling of DC.

 

illuminatus's picture

The Fed really does not have any power.  It is all jawboning.  As long as people believe they actually have any sort of control over anything, it works!  Pure fucking illusion.'

I disagree. While I agree is all illusion, I disagree that they have no power. they have all the power that their fiat can buy. As long as people believe in their currency, they don't need any power, the power is in the belief that the currency has value.   This makes all the difference.

centerline's picture

They are out of their purvue in doing that though.  They are supposed to be about liquidity - not purchasing government debt.  This I think is how they are going to gig DC by the way.  Regarding rates, markets really set the rates one way or another. 

Duc888's picture

 

 

Why of course, decimate the eCONomy, Trump is in.

taketheredpill's picture

 

 

And oh yeah!! No more Bailouts, no matter how much we beg and plead!

 

 

Robert Trip's picture

"Holy Fed Fuckup Batman!"