Don't Fight the Fed

financedude85's picture

Alexander Hamilton, George Washington’s Treasury Secretary, in his first “Report on the Public Credit” in 1790, put forth the concepts of “assumption” and “redemption.” He argued that the federal government should assume the Revolutionary War debt of the states and pay those debts at “face value” in full to the bearers of such debt on demand. In order to redeem the $75 million of bonds, Hamilton promoted creation of a “sinking fund” that would pay off five percent of the bonds annually. Revenue to pay off the principle and interest should come from tariffs on imported goods and an excise tax on whiskey. Bondholders would be due 4% annual interest payments.

Today, the total value of US Treasury Bills, Notes, and Bonds is above $20 trillion and rising. US Treasuries are the global standard of debt, as is the US Dollar the standard for currency. A bond investor today would enthusiastically buy 4% US Treasuries, if he could buy them at “par value” or $1000 per bond. Today’s 10 Year Treasury Note Yield is 2.309%. In today’s bond market, a 4% bond is worth $1150, according to the Hewlett-Packard 12C calculator, a $150 “premium.” However, if a bond investor believes that market interest rates will rise over time, the price of that 4% bond should fall until the market rate, now 2.309% matched or rose above the bond’s “coupon rate” of 4%. The decision to buy, sell, or hold US Treasuries takes into account the “interest rate risk” just described.

US Treasuries today carry the lowest “default risk” among global government bonds, so investors need only consider interest rate risk. Bond prices determine not only what a bond investor will receive twice per year in interest payments, but also what a borrower pays monthly to finance a home purchase or start a business. That is where the rubber meets the road for the Fed’s influence on economic expansion or contraction. The driver of the vehicle to which those wheels are attached is the Federal Open Market Committee (FOMC). It directs the market operations of the Federal Reserve System (The Fed).  Fed action affects the price, and thus the yield, of US Treasuries by buying and selling in the open market. When the Fed buys, it decreases the supply, increases prices, and lowers the yield. Selling increases supply, decreases prices, and raises the yield.

The Fed also sets the Fed Funds Rate, the interest rate at which banks may lend money to each other on an overnight basis. The rate at which banks can borrow also influences the rate at which they will lend to their customers via home mortgage and business loans. The higher the Fed Funds Rate, the higher the interest rates on loans. Most often, the effective Federal Funds Rate is lower than the yield on US Treasuries, but not always. If the Fed wants to slow the economy, it will raise the Fed Funds Rate and make it more expensive for banks to borrow. Paul Volker’s Fed, in June of 1981, raised the Fed Funds Rate to a peak of 20% in order to squelch the rampant inflation of the 1970’s. He succeeded. His Fed’s action was accompanied by the 1980-82 recession and its 10+% unemployment rate.

If the Fed wants to encourage lending by banks, it can lower the Fed Funds rate. If banks can borrow at a lower rate, their loans to homebuyers become more profitable, and they will tend to lend more, but not always. During the 1990-91 recession, which followed the Savings and Loan Crisis of the late 1980’s and the invasion of Kuwait by Iraq, Alan Greenspan’s Fed dropped the Fed Funds Rate from 9.75% in December of 1988 to 3.0% in September of 1992. Greenspan stated his frustration with the stubborn 7+% unemployment rate and banks’ unwillingness to lend by saying, “You can’t push on a string.”

Paul Volker’s Fed proved that rising interest rates will eventually slow the economy and stem inflation, but his successors—Alan Greenspan, Ben Bernanke and Janet Yellen—did not meet with equivalent success by lowering rates to stimulate the economy and reduce unemployment. It turns out that bankers will not lend unless they see a potential for profit. Loans to poor credit risks can end up as losses on the balance sheet and unemployment for loan officers. Bankers want to make money, but they also want to keep their jobs.

Confronted with what would later be known as “The Great Recession,” Ben Bernanke’s Fed dropped the Fed Funds rate from 5.25% in June of 2006 to 0.25% in December of 2008. Even though banks were able to borrow at an effective 0% interest rate, unemployment continued to rise. The unemployment rate was 10.0% in October of 2009 and did not drop below 9% until October of 2011. The Organization for Economic Co-operation and Development considers full employment to be an unemployment rate of between 4% and 6.4%.

For Ben Bernanke, author of Essays on The Great Depression, the worst economic event in US history was not the inflation of the 1970’s, but the deflation of the 1930’s. When, in 2008, a zero-percent Fed Funds rate had little effect on the unemployment rate, Bernanke’s Fed began buying bank debt, mortgage-backed securities, and treasury notes. The intent of this “quantitative easing” was to flood the banks with liquidity in order to bring down long-term interest rates. By the end of his second term, the Federal Reserve had transferred $4.5 trillion to the US Treasury from bank balance sheets. When Bernanke’s second term as Fed Chair ended in 2014, unemployment was still at an unacceptable rate 6.7%.

Janet Yellen, the first female Chair of the Federal Reserve, defended quantitative easing, but vowed to revert to traditional monetary policy when economic growth and unemployment returned an acceptable level. Her Fed targets a 2% growth rate for Gross Domestic Product (GDP) and is now close to achieving that goal. The US economy expanded at an annualized rate of 3.1% in the second fiscal quarter of 2017. Yellen’s Fed has increased the Fed Funds rate four times and projects continued gradual rate increases. On Tuesday, September 27th, Ms. Yellen told the National Association for Business Economics, “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.” But she also admitted that the Fed’s understanding of inflation is “imperfect” and that the apparent lack of inflation in the current full-employment economy is “a mystery.” She said, “We recognize that something more persistent may be responsible for the current undershooting.”


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Maestro Maestro's picture

The dollar's value is UNDEFINED. (The dollar is also ILLEGAL according to the United States Constitution.)

You cannot even legally have a single contract whose value is UNDEFINED let alone an entire economy, a global economy in actual fact, based on dollars whose value is UNDEFINED.

Yet you do.

This proves that Americans, Europeans, the Chinese, the Russians, the Indians, the Jews, and the Arabs are morons who want everything for nothing.

You all want something for nothing.

You got it.

LawsofPhysics's picture

Guess what fucknut?  So long as people accept paper/digital fiat currency in exchange for the product of their labor NOTHING changes.

"Full Faith and Credit"

runnymede's picture

The magic is belief. If I just believe hard enough what I get told.......

Same as its always been. 

Bluntly Put's picture

Logically where else can it go? Because there's so much debt that's programmed the economy, most economic activity is servicing debt, swirling around like a toilet bowl.

So the new credit flows into asset prices instead of flowing into the economy to raise wages. Since corporations dominate economic activity, they can issue bonds at artificially low rates and buy back their stock to inflate the price. The company gets hollowed out so they can't or don't give raises.

All this is enabled by the artificial rates.

Bluntly Put's picture

But she also admitted that the Fed’s understanding of inflation is “imperfect” and that the apparent lack of inflation in the current full-employment economy is “a mystery.”

That's because all the inflation went into asset prices, stocks bonds and real estate.

J J Pettigrew's picture

Also, the consumer's disposable income, that which can drive prices, has been sopped up by the SPIKE in health insurance costs....a monthly drain ...

The SPIKE in health insurance prices did not move the inflation needle because it is so lowly weighted in the CPI.....down with firewood and magazines...which is ridiculous.... and the FED to point to the CPI is aburd.

razorthin's picture

What fight?  I'd punch her in the head, she'd go down.  That's all.

ReturnOfDaMac's picture

C'mon never ever hit a lady, specially an older one.  Just take her printing press.

ReturnOfDaMac's picture

Hey man, if you can't beat 'em buy 'em.  BTFD.  Especially bank stocks. Find a bank you HATE and buy it...

J J Pettigrew's picture

The banks are being paid handsomely for their exces reserves at the Fed. 

That is new....and a gift.  The promoters of this point to Friedman suggesting this is a good thing, but his comments were NOT to EXCESS reserves...only required reserves. Bankers at the Fed deciding the Fed pay bankers.....nice cul du sac of incest

moneybots's picture

"Don't Fight the Fed"


Such famous last words. 


In 2001 Greenspan rapidly dropped the FED rate, yet the market fell all the way into October 2002, completing a 76% decline in the Nasdaq. The market also fell for a year after the 2001 recession ended in October 2001. The market lagged the economy by 12 months.

Dragon HAwk's picture

You can't fight City hall, is Government Propaganda

runnymede's picture

City hall has an ace up it's sleeve. The entrenched power to levy taxes and confiscate property, and numerous loyal minions who get their money and retirements enforcing City Hall's crimes. 

Fighting city hall is always possible. The degree of difficulty has just increased, as have the numbers of people with interests vested in the perpetuation of the  criminal status quo. 

gdpetti's picture

Exactly, the best way to fight them is to stop participation in their game, which itself comes at a cost of losing potential profits even if they can evaporate overnight before the next market opening. They will pull the rug when ordered to do so, all these Fed banks have owners that these guys/gals work for... they aren't independent operators, which is why most of their policies don't make sense to anyone that thinks rationally and for the good of the nation, for the real controllers see us as sheep to be herded, controlled, dominated etc.... they see the country as theirs, not OURs... same in any empire.... same type of people, same type of thought, same type of owners... same policies, same rise and fall.

It's all propaganda... and they changed the laws of ownership under Reagan thru Clinton to buy up all those media units they didn't already control/own... which then had to go online.. which is why they are targeting the net now, such as RT.... etc... anyone that tells the truth is a clear and present danger to them. The Truth can set you free, which is why they don't want us to have access to it. Simple.

Disengage, that's what most of the 'smart money' is doing.

Maestro Maestro's picture

Could have been prevented or mitigated by specie money.

pump and dump's picture

Only buy gold if you can buy low and sell high. Very hard to do though. Do not let emotions trick you. That is a recipe for disaster.


pump and dump's picture

Evildimensions is right, the market sets the interest rate the fed sees it coming and then says they are raising it.

It is another illusion. Greenspan said 'I did not raise the rates the market did".


J J Pettigrew's picture

that's how it was in the 70s and 80s....but QE changed that....

pressing rates below the inflation rate is new...and 9 years old.......the market did nt take rates to a "negative", Ben and Janet did.

evildimensions's picture

Don't fight what? The FED doesn't do anything. Interest rates are driven by 90 day t-bills. The FED is merely a toothless tiger.

I am amazed at how long this myth has persisted.

J J Pettigrew's picture


the past 9 years of rates below inflation is a manufactured situation.....with QE etc.....


Silver Savior's picture

I have heard that any time you buy precious metals you are fighting the fed. So why wouldn't you?

Hugh Mann's picture

Fuck the Fed and their fraudulent counterfeiting operation! The Federal Reserve creates money from thin air, loans us this fake money with interest. When we can't repay the loan, they take everything we own. They're getting something tangible for nothing! Scam, scam, scam.

J J Pettigrew's picture

Don't fight the Fed. Get in bed with them, right Lloyd B?

Normalize Promise is BS.

Bernanke promised normalization in July of 2009 (WSJ) if and when unemployment would dip below 6.5%.  That was years ago.....

and they still promise "normalization".

Taylor is right. Rates SHOULD BE a premium to the posted (faked low CPI) rate around 3% right now...but they won't because THEY CANT.

Rates for the 20th Century were nearly always above the inflation rate.......and Bernanke and Yellen have pegged them below for NINE YEARS!!!! 

Perimetr's picture

What could possibly go wrong?

Silver Savior's picture

I do my part to get in bed with the fed. I buy Ripple xrp. I fight them at the same time by buying metals with worthless currency. 

Consuelo's picture



I... I ---  I buys Rrippple tooo, buurrrrrpppp....    Ready to kcik there aasss tooo