Federal Reserve

Overheated Economies And Market Predictions

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OVERHEATED ECONOMIES AND MARKET PREDICTIONS

Janet Yellen said the following last week…

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat” 

Later that same day, she said this…

“It’s not something I’m predicting or recommending. If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”  

Also last week, we heard from the Federal Reserve which released the following statements  on Thursday, May 6, 2021…

  • Rising asset prices are posing increasing threats to the financial system, the Federal Reserve warned in a report Thursday.
  • “Asset prices may be vulnerable to significant declines should risk appetite fall,” the central bank said.

Before we can understand how to interpret these statements and any possible conflictions, there are four key topics which need to be explained: inflation, the Federal Reserve, interest rates, and the economy. 

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No Fear Of Inflation; Threat Of Deflation

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FED HAS NO FEAR OF INFLATION

The Fed wants to have their cake and eat it too, but the cake is stale. Jerome Powell’s remarks in testimony before the Senate recently provoked considerable attention.

Responses, interpretation, and analysis by observers were many and varied. Unfortunately, no one learned anything different from what they thought they knew before Powell’s testimony.

The Fed is well aware of the problem. It is systemic in nature and goes far beyond corporate due diligence, bank liquidity, and the safety of your broker.

Most everyone else (with the exception of Janet Yellen, Ben Bernanke, and Alan Greenspan) thinks they understand the problem, but their limited understanding doesn’t allow for the subtleties of Fed Chair behavior.

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Powell And Yellen – Team Fed

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POWELL AND YELLEN…

Flashback 11/21/2017:

“President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.” (see New Fed Chairman, Same Old Story)

Currently, comments by Jerome Powell last week regarding inflation and its effects spooked some investors and analysts.  Investors in leveraged Treasuries were dealt a severe blow when yields spiked and bond prices fell. Others have claimed that the sky is falling and that inflation is all around us.

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Judy Shelton (Thank You) And Janet Yellen (She’s Back)

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JUDY SHELTON AND JANET YELLEN… 

Last week the Senate failed to confirm the nomination of Judy Shelton as a member of the Board of The Federal Reserve. Some thoughts and observations.

If it had done so, and once she was occupying a currently vacant seat on the board, we might reasonably have expected some fireworks.

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The Fed Always Does Its Job

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The Fed always does its job. So, just what is their job? And, how well do they perform?

For the answer to the first question, one statement will suffice: The Fed’s job is to create money; at all times and in all seasons. 

The Federal Reserve Bank creates money for the US government to spend and for banks to loan. It is a partnership that dates back more than one hundred years.

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Federal Reserve vs. Judy Shelton And Gold

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FEDERAL RESERVE VS. JUDY SHELTON 

Those in favor of Judy Shelton’s approval by Congress, pursuant to her nomination to the Federal Reserve Board Of Governors, should not be surprised by the torrent of criticism directed at her.

A letter published and signed by former Federal Reserve officials and staffers called on the Senate to reject her nomination, stating that “Ms. Shelton’s views are so extreme and ill-considered as to be an unnecessary distraction from the tasks at hand…”

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Gold Market Manipulation And The Federal Reserve

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GOLD MARKET MANIPULATION 

Some gold bulls have bought in heavily to the argument that gold price suppression has been an ongoing activity for years, even decades. Supposedly, trading in the gold market is manipulated in ways that depress the market price for gold.

Assertions are made that the manipulation takes place in a shroud of secrecy; and the unexpected lower prices for gold, or prices that don’t meet wildly bullish expectations, are cited as evidence of conspiratorial activity.

The claim is made that the price of gold would be much higher if this manipulative trading activity were exposed, acknowledged, and prohibited. But…

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Fed Action Accelerates Boom-Bust Cycle

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FED ACTION ACCELERATES BOOM-BUST CYCLE

The 21st century was ushered in by fears about Y2k and how it might impact computer programming that was already in place. Part of the concern centered on the financial markets.

The Federal Reserve announced that they were ready to support the stock market and provide backup for financial institutions that might encounter difficulties.

The big day arrived and, other than an occasional glitch that seemed to be unrelated to the heightened global fears, the birth of the new century was pretty much uneventful. Overall, the markets remained relatively quiet. However, trouble was still brewing.

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Investors Act Like Spoiled Children

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When a small child wants some candy or a treat, they usually ask for it. When they don’t get it, they might throw a temper tantrum. They might also throw a tantrum when they want more: more candy, more dessert, etc. 

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US Government Is Beholden To The Fed; And Vice-Versa

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US GOVERNMENT IS BEHOLDEN TO THE FED

We hear quite a bit today about the issue of Federal Reserve independence. The crux of the argument usually centers  on monetary policy executed by the Fed versus opinions of politicians and others who want and expect something different, which they believe will provide more favorable results.

President Trump has been ardently vocal in demanding that the Fed be more aggressive in cutting interest rates.  He also wants, and is encouraging, action that would result in a weaker US dollar. He believes that it would be good for American businesses. His reasoning is that a weaker US dollar would make American-made goods more competitive.

Whether or not the President is correct doesn’t matter for purposes of this article. What is important is that there is a wide difference of opinion between the Federal Reserve and its current policies (re: Jerome Powell) as compared to the wishes of the United States government (re: President Trump).

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