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Bernanke Describes Fed Plan of “Letting Up A Bit On The Gas Pedal”

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Bernanke Describes Fed Plan of “Letting Up A Bit On The Gas Pedal”

The fourth FOMC meeting of the year finished this afternoon with a release of the policy statement. There was also a press conference and a release of economic projections.

The most significant outcome of today was Chairman Bernanke’s description of how he expects the Fed to taper its bond-buying program. In his press conference he described the change using a car driving analogy of “letting up a bit on the gas pedal as the car picks up speed, not to begin to apply the brakes”. The Chairman said that if the economy continues to improve as expected, the Fed will likely begin to taper its bond-buying purchases later this year and keep reducing the purchases until new purchases end around the middle of next year. That news appeared to have spooked the markets. The stock market had big losses, and the 10-year Treasury yield rose to 2.33% from 2.18%. You have to wonder what kind of stock market losses we’ll see when the Fed actually begins to taper.

For savers the tapering is only the start of a long process which will lead to higher deposit rates. Chairman Bernanke said that increases in the target Fed funds rate is unlikely to take place until long after the bond-buying ends. The latest FOMC projections show 14 out of 19 of the members believe the first rate hike will likely take place sometime in 2015.

The Chairman mentioned a few times that the 6.5% unemployment target is only a threshold and not a trigger for higher rates. That means that they will consider other factors before deciding to raise rates. This is where the Chairman can have a large impact to policy. A dovish Chairman could lead the FOMC into delaying rate hikes. I know many don’t like Chairman Bernanke, but he’s not considered the most dovish member. If he steps down in 2014 and someone more dovish takes over (like Janet Yellen), that could result in a longer delay before the Fed decides to hike rates. That’s especially the case if inflation remains below the Fed’s 2% target.

One interesting thing to note in today’s FOMC statement is that there were two members who voted against the monetary policy action. In recent past meetings, only Esther L. George had voted against the action. George continued to vote against the action today with the same inflation-hawk argument:

who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations

The new “no” vote came from James Bullard, but he was actually arguing for more accommodation:

who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings

That could be a bad sign for future policy tightening. If inflation continues to be below the 2% target, more FOMC members may push to delay the tapering which will delay rate hikes.

Calculated Risk Blog has a useful summary of today’s meeting and economic projections with tables of how the projections have changed. Most noteworthy is the downward projection of PCE inflation for 2013. As CR mentioned:

The Fed is clearly missing on the low side of their inflation target. If that continues, the next move will be to increase purchases!

I wish we could experience this “low” PCE inflation. I think many of us feel that we see much higher inflation with the essential items we purchase for day-to-day living.

Future FOMC Meetings

The next two FOMC meetings are scheduled for July 30-31 and September 17-18. The September meeting will include the summary of economic projections and a press conference by Chairman Bernanke.



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Comments
15 Comments.
Comment #1 by Anonymous posted on
Anonymous
In this environment, maybe directly purchasing a 30-year treasury yielding 3.41% and holding it until maturity may not be so crazy. The principal is guaranteed, you'll recieve over 100% of principal in interest over the term, and if you're gone in 30 years you'll leave something to your heirs, even if inflation has eroded it. 

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Comment #9 by Anonymous posted on
Anonymous
#1, trust me... buying a 30 year bond IS CRAZY. The Fed has no intention of exiting right now, as is clear from the statement, with one true objection and one (Bullard) who wanted to increase accomodation. But, that doesn't mean it isn't going to happen. When it does, bond yields will go nuts. As you can see, bond yields have already risen dramatically. The ten year treasury has gone from 1.37% a few months ago, to 2.4% now. That hasn't affected savers much, because banks have not passed on the profits they are making from the rate changes, and some of the less well connected banks and insurers have lost money on the movement of rates upward.

But, keep in mind that most of the current Wall Street panic is unjustified. A big fake-out has been created, whereby the FOMC statement is misinterpreted to mean that the Fed is going to exit QE, which it has no intention of doing. The big bankster organizations in NYC, who get their profits mostly from derivatives, and not traditional banking activities, are literally holding tons of gold and silver as collateral for stocks, bonds, commodities, etc. on which long speculators have made bets. It is in their interest to induce a temporary bond and commodity crash in order to take that collateral from its owners in margin calls.

The manner in which the gold market crashed in mid-April, and yesterday's crash, involves huge sales of thousands of tons of fictitious paper-based "gold" positions. The physical market is still booming in all the precious metals. But the casino-bankers are using paper to scare the over-leveraged long investors, and to create a domino effect. If successful, the manuever will allow these banksters to go heavily long gold and gold-like assets, like silver and the other white precious metals.

The mid-April manipulation event was very successful, and, the very next month, the CFTC bank position report showed that the casino bankers of NYC and London had turned from heavily short on gold to heavily long. That is a change worth tens of billions of dollars. They also managed to close a huge number of short positions in silver. By July 6th, when Commodity Futures Trading Commission next bank position report data is collected, I am sure the casino-bankers will be heavily long silver as well, thanks to the operation we are now seeing underway.

I would stay away from bonds, right now. Stick with liquid MM accounts, like the Barclays account, and, maybe, SmartyPig, that pay the best interest rates. Buy some gold, silver or platinum because the prices are now very favorable. If you must invest in bonds, or CDs, buy ones with short terms. Sooner or later, the rates are going to skyrocket, because the fake economy, and the money-printing may go on indefinitely, but the longer they print, the less effective current levels of printing will be in holding down rates. The key to QE is the flow, not the absolute amount of money that has been piled up. Eventually, they will be forced to raise the flow, meaning more money printing, and higher and higher levels of inflation that they will not be able to deny indefinitely, or rates will need to rise.

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Comment #12 by Anonymous posted on
Anonymous
#9 Thanks for the in-depth commentary. I said "may not be so crazy" because of the chaos and uncertainty I see in the markets. Today the 30-year closed at 3.60%. When will bank deposit rates reach anywhere near that? As to investing in metals, I think you have to have an iron stomach for that, and I can't even tolerate spicy foods.  

2
Comment #14 by Anonymous posted on
Anonymous
#12,

I understand your desire to get a decent rate of interest, and your fear of gold, silver and platinum, giving all that has happened over the past few months.

But, right now, returns on bonds and CDs are miserable, and stocks are highly overvalued. Buying a 30 year bond, at 3.5% in this rate environment, might work for a year or two of collecting interest, or might not. But, we are clearly in the middle of a rampant money printing cycle that will end in tears.

Eventually, interest rates are going to rise precipitously, whether or not the Fed wants it, because the alternative will be hyperinflation from unlimited money printing. Once the velocity of money rises back to normal, goods and services prices will probably triple in short order. It seems to me that this is going to be more ulcer-causing for a 30 year bond holder than any amount of gold market manipulation.

I won't put all my money into gold, but, if I put 20-30% into precious metals, it will to offset long term "buying power losses" that are inevitable on the cash portion of my portfolio. With the big NYC players now long gold, and going long silver, for the first time since the big price rise at the beginning of the bull market, I think it is a fair bet. But, ready cash is important to, and that's where Barclays and Smarty Pig come into play.

3
Comment #2 by Anonymous posted on
Anonymous
This adds up? Because of the lack-lusteredness of the economy, the Fed has done 2 main things: (a) pump up the stock market by monetizing debt to create paper wealth and (b) lower interest rates effectively to zero using monetary policy in order to stimulate the economy by lowering the cost of borrowing. Now, the debt monetizing policy will be ending but the basement interest rates can't be ended so soon because the true condition of the economy So what are those with considerable holdings in equities going to do when the monetizing policy ends and interest rates stay low? Will the created paper wealth created by the monetization policy then be seen to effectively become vaporized?

7
Comment #3 by lou posted on
lou
Ken, your synopsis of the FOMC meeting and the subsequent press conference is the best one I have seen today. With your usual clarity of thought and ability to put pen to paper, you have given us an excellent summary.

8
Comment #4 by Uncle Ben (anonymous) posted on
Uncle Ben
It will be like pulling his foot out of our collective a55es rather than letting up on the gas pedal.

3
Comment #5 by Inforay posted on
Inforay
I am extremely concerned.  Even if Bernanke stops his bond purchases or "tapers" them, by now the banks have so much cash that they will have no incentive or need for savers' money and no reason to pay more than 1% or so, interest.  They are already having a tough time lending money.  So regardless of what happens I fear we will be in a low interest rate situation for a long time.  The Federal Reserve has literally stolen from savers to the tune of thousands of dollars over the last five years by creating money to purchase bonds and even if they stop now, we have been placed at a tremendous disadvantage from which we might not recover for years to come.

5
Comment #6 by Anonymous posted on
Anonymous
Inforay, I was estimating my interest "lossed" in the last few years.  It's in the 6 digits.

6
Comment #7 by Inforay posted on
Inforay
I believe the low federal funds rate, followed by QE1, QE2 and QE3 were an excuse to boost the stock market and give away free money to banks who had made imprudent lending decisions.  I doubt they did anything to increase employment or prevent a rescession.  Bernanke has bet his legacy as Chairman of the Federal Reserve on how well the stock market performed and he did eveything in his power to see that it rose year after year.   The increases in the stock market were at the expense of prudent people who saved all their lives hoping to live off their interest income.  It is really very disheartening that one individual has so much power in a democracy, no less, to affect the lives of so many people.  Santelli's comments are interesting.  You can see themt at:

http://www.cnbc.com/id/100828431

4
Comment #8 by lou posted on
lou
Inforay, that cnbc video was very entertaining. Although some might say Santelli is being hysterical, I think he is genuinely angry as to what Bernanke and the FED is doing to our country. In my view, what has happened in the last few days is only a preview of what is going to happen to this country at some point in the future if the Fed doesn't take its foot off the easy money pedal. It may feel good now for leveraged stock and bond market speculators, but it will take them down along with us savers and all the people living on Main Street. The Fed's money printing machine is starting to sputter and the addicts who crave the easy money are beginning to have withdrawal symptoms.

6
Comment #10 by Anonymous posted on
Anonymous
I further agree with everyone here who has expressed frustration with the Federal Reserve. It is a bankster dominated bubble machine that has amplified the normal boom/bust business cycle which is necessary to the creative destruction process of capitalism. It would be much better to close down the Federal Reserve, end the printing of Federal Reserve Notes, and return to printing US Notes that are backed 100% by a gold standard.

Realistically, however, that is not going to happen. The Fed is too valuable to politicians who want to enact giveaway programs on a grand scale and cannot raise enough legitimate revenues to pay for them. Thus, the NYC banksters have a quid pro quo with Washington DC. They get guaranteed against losses, they get a slush fund to draw from whenever they need cash, and, in return, they've created a money printing machine that supports the politcal desire to make promises that cannot be kept.

Because I have no faith in a group of mandarins who try to centrally plan the economy, I don't buy CDs anymore, since they are denominated in the money that is being printed. Sooner or later, the printing will take its toll. Indeed, we are already seeing a return to rampant home price inflation. I do still have some treasury bonds, but I'll be selling them soon. I want to buy gold, and the recent price reductions (which I am certain is the result of price manipulations in the paper-gold market and not a true reflection of the booming physical market) does set a favorable backdrop to that desire.

But, I also want to keep a store of ready cash to draw on, so short term CDs, or better, savings accoutns like the SmartyPig and Barclays accounts, which offer free access at yields that compare favorably with short term CDs seem to be the best bet for that.

4
Comment #11 by Anonymous posted on
Anonymous
Anyone who wants an excellent discussion of how the NYC banksters caused the World Financial Crisis needs to read Matt Tiabbi's new article:

http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619?

3
Comment #13 by Bri (anonymous) posted on
Bri
Ken, I heartily agree with your statement: "I wish we could experience this “low” PCE inflation. I think many of us feel that we see much higher inflation with the essential items we purchase for day-to-day living."  I sure feel it in almost everything we buy.  If the price is not increasing, it seems like the quanitity or size is reduced.

3
Comment #15 by Inforay posted on
Inforay
Is it worhtwhile purchasing I Bonds if we expect inflation to rise?   would anyone please be able to let me know the pros and cons of that?  Thank you very much.

2