Fed's Asymmetric Bubble-Blowing Policy in Pictures

-edited

The Fed meets on July 31 to make an interest rate policy decision. What should the Fed do?

Jim Bianco at Bianco Research says Only a Half-Point Rate Cut From the Fed Will Do.

"Anything less would fail to fix the imbalances in the global bond market, continuing to weigh on economic sentiment," says Bianco.

"By lowering its target for the federal funds rate by just a quarter point, the Fed risks no less than a recession. The Fed has a history of moving too slow to respond to evidence of weaker growth, and a bold move now would help ensure the economy achieves the rare soft landing.”

I replied

I stand corrected. With his charts, I concede that Bianco made a solid case for cuts.

Yet, his charts highlight something more important.

Fed's Asymmetric Bubble-Blowing Policy 1992-Present

Chart courtesy of Bianco. The title and blue boxes are my anecdotes.

Bianco notes "In the 1990s the fed funds contracts only went out 6 months. That is why the lines are short. In the 2000s they went out a year, lines are a little longer. Around 2007 they started going out three years, the longest lines."

Each calendar years is a different color.

So the yellow to the upper right is 2018 (each month end … so Jan 31, Feb 28 and so on, the forward curve projected up to 2021. Black, in a downtrend, is 2009)

Let's hone in on the period starting 2009.

Fed's Asymmetric Bubble-Blowing Policy 2009-Present

Market Screaming for Hikes

The market was screaming for hikes for five years.

The Fed did not deliver.

Too Low, Too Long

That the Fed did not deliver hikes as expected is part of its asymmetric policy of keeping interest rates too low, too long,

Bubbles Blown

Without a doubt the Fed blew more bubbles, and likely the biggest in history.

The market responded with a prolonged yield-curve inversion.

Yield Curve

Spread

  • The effective Fed Fund Rate is currently 2.41%.
  • The yield on the three-year Treasury Note is 1.80%.
  • The spread is -0.61 percentage points

Behind the Curve

Bianco is correct. The Fed is behind the curve.

And by his logic it's not clear that 50 basis points is enough of a cut.

But to what avail?

So What? Bubbles Already Blown

Let's return to Bianco's opening gambit: "Anything less would fail to fix the imbalances in the global bond market, continuing to weigh on economic sentiment."

On July 18, I wrote Half-Point Rate Cut Odds Explode to 71% - So What? It Doesn't Matter!

The Fed, with its asymmetric too-low too-long policy blew bubbles that are impossible to fix.

Too Late for Insurance

Rate cuts now as economic insurance is like trying to buy insurance on your car after you wrecked it.

The bubbles have been blown.

Even if the Fed can correct current "imbalances" it cannot "unblow" bubbles anymore than it can unblow a horn.

Deflationary Bust Baked in the Cake

In the Fed's foolish attempt to stave off consumer price deflation, the Fed sowed the seeds of a very destructive set of asset bubbles in junk bonds, housing, and the stock market.

The widely discussed "everything bubble" is, in reality, a corporate junk bond bubble on steroids sponsored by the Fed.

For discussion, please see Junk Bond Bubble in Pictures: Deflation Up Next

Rate Cuts Don't Matter

The bottom line at this point is an economic recession is baked in the cake. The global economy is slowing and the US will not be immune.

The debt deflation horn has already sounded.It will not be unblown no matter how big the cut.

Mike "Mish" Shedlock

Comments (40)
No. 1-16
RB2
RB2

Excellent points around the horn. The fed f/u'p from way back. 09 was just the storm to show they are clueless. Right up to Ben's words that the 'crisis' was transitory. Yah right the 'bean' was wrong, Yellen was out to hunch, and now Powell living in the opaque glass tower shows us how far he/they cannot see. THE run up of debt is a very serious issue in these times as well.

DFWRealEstate
DFWRealEstate

Nice view of the Fed's fealty to Wall Street in pictures. The Federal Reserve is a creature born of Wall Street banks to serve Wall Street banks. Inflation targets, full employment, price stability and the ruse of "independence" are just the lip gloss on the pig, a facade to keep the public distracted from their real unstated mandate.

Captain Ahab
Captain Ahab

What the chart tells me is the Fed carried the water for the Obama Administration, and made Wall Street wealthy at the cost of middle class savings and pension plans. Consistently, during this period, futures contracts indicate the rate should be higher, but the Fed stubbornly, some would say stupidly, kept the rate at 'zero', inflating the stock/bond markets. Now in hog-heaven, even the slightest increase in rates sends the lemmings rushing to the cliff.

Realist
Realist

You are correct about one thing Mish; it doesn’t much matter what the Fed does anymore. The damage has already been done. We will have to live with the consequences.

Where I disagree is the future course of events. The very fact that the Fed will continue with stimulative policies, egged on by both governments and markets is going to result in continued slow growth and low inflation; slogflation. Growth will slow to 2%, then 1%, then 0 over the next decade. Inflation will probably stay around 2%.

The net result will be lower living standards for the vast majority of the US population.

Couple that with the rise of populism, where countries fight over the little growth that is available, will result in less growth overall. Trump’s populist policies (MAGA) are already disrupting global supply chains which will slow economic growth. As other countries fight back, everyone loses. I agree with you when you say that everyone loses in a trade war.

Populism will also result in countries fighting over declining water resources and increasing population displacement issues.

Something else baked in the cake for the next hundred years or more will be global warming. This will result in a multitude of negative consequences for the entire world.

There is hope however; by working together on solving the global warming issue, it will actually be economically stimulative. But if instead we fight each other with “beggar thy neighbour” policies, it will indeed be a catastrophe.

2banana
2banana

It is almost like something magically happened in 2016.

Too bad we can't figure out what major event happened in 2016.

It is a mystery. The market begs for rate increases 2010-2015. But yet nothing.

And then suddenly - at the end of 2016 onwards - lots of rate increases.

I am sure this had nothing to do with politics.

The Fed is supposed to be an independent and objective steward of a stable "sound money" system.

Tony Bennett
Tony Bennett

Bianco: Nary. A. Single. Word. On. QE.

Referencing financial easing/tightening while only discussing interest rates shows a lack of full comprehension (much like how many claim labor market tight due to low UE without a mention of participation rate.) QE ended 2014, but no significant QT till 2018 ... or when markets begin to cry out.

Not to mention liquidity is global. Bianco zero comment on what other central banks doing/not doing. The Federal Reserve the lead dog, but not the only one.

HubbaBuba2
HubbaBuba2

The late great editor of Barrons, Alan Abelson, had a column on this 'after the fact Fed. (I happened to be later in his column so of course, I remember it!) 1/12/04 his colomn started it with "WHAT DO YOU CALL A FIRE DEPARTMENT that concentrates not on putting out the fire, but on cleaning up afterward? Different, if you're polite. Insane, if you're us.., Or, as he so eloquently put it: "Instead of trying to contain a putative bubble by drastic actions with largely unpredictable consequences, we chose...to focus on policies to mitigate the fallout when it occurs.""

lol
lol

Fed is now in full Zimbabwe mode,always have been but now they're not even attempting to hide it.Question is will a new round of massive around the clock money printing buy enough time to at least make the next election cycle without the dollar (govt)collapsing ?

Maximus_Minimus
Maximus_Minimus

I don't know, why pick a fight with this Bianco guy. He obviously returned from a long trip to Mars.

"the market rarely demands cuts, this is the first time in 11 years". Maybe because the interest rate was zero for most of those 11 years? Math is hard.

KidHorn
KidHorn

The FED can't raise rates as long as the ECB, BOJ, etc... Keep their rates ultra low. It makes the USD too strong.

CautiousObserver
CautiousObserver

Looking at the long term trend, the Fed is right on schedule to cut rates and they are more likely to cut 0.5% than not.

Casual_Observer
Casual_Observer

Regarding the Fed and all this mumbo jumbo on rates, they will cut and blow a bigger bubble and hope that it doesn't crash all the way back to 2009 levels. But I suspect at some point all asset prices will decline by 50% from peak to trough. Where that peak is is anyone's guess but I'm certain the trough will be 50% off the peak. The timelines are sometime in the next 5 years when the busts of student loans, healthcare costs and everything else hit at the same time. The next decade is going to be ugly folks. We will be lucky to get out of it with 1% GDP per year.

Ted R
Ted R

The next depression will be the Fed's fault. Nobody else to blame. If it happens on Trump's watch I live in fear about how he and his ego will handle it. Politicians are so incredibly stupid about economic matters. So is much of the population.

jlsv
jlsv

what the Fed should do, what the market wants it to do, and what it probably will do can be 3 different things. the Fed Funds futures market is only a bet on what it will do, not what the market wants. look at 2013 in the chart. Fed funds were betting the fed would raise. looking at other parts of the credit markets and the stock market, it's pretty easy to make the case that was not what the markets wanted. and we can argue about what it should have done.

jivefive99
jivefive99

With the Fed Govt. overspending revenues year after year after year, I dont see how the Fed has any choice but to push down interest rates using any type of "logic" they want to use. Absolutely no one gains from interest rates going upward, except for savers, and they are already dead and buried.