Courtesy of John Rubino.
It’s safe to say that the Federal Reserve, along with everyone else who thinks of themselves as in charge of the economy, would like a world in which interest rates are low, the dollar is stable, jobs are plentiful and the government is free to borrow and spend whatever it takes to get every incumbent re-elected forever.
The problem is that the last part – freedom to borrow with impunity – is, in the long run, incompatible with the other stuff. And we’re now living in the long run , which is to say the real world. Everything from here on out is a trade-off. Continued debt monetization will push up rates rather than depress them. “Tapering” will smack a stock market addicted to a “Fed put”. So pretty much everything that comes out of Ben Bernanke’s mouth will send part of the financial system into paralytic shock. Eventually, EVERYTHING he says will traumatize ALL the major asset classes simultaneously. That will be both fun to watch and unbelievably chaotic and ugly. Today was an appetizer:
Fed tapering could begin later this year
WASHINGTON (MarketWatch) — Federal Reserve Chairman Ben Bernanke said on Wednesday that the central bank may start to scale back its asset purchases later this year if the economy continues to strengthen as the central bank expects. The Fed, which kept monetary policy on hold after a two-day meeting, signaled greater optimism about the economy, forecasting that the unemployment rate could fall to 6.5% by 2014, one year sooner than the central bank had previously estimated. The central bank also said the U.S. economy could expand faster than 3% in both 2014 and 2015.
The Fed’s newly revised forecast and Bernanke’s comments slammed U.S. financial markets. Stocks on Wall Street ended sharply lower and the 10-year Treasury yield surged to 2.33%, its highest level since March 2012.
The central bank’s $85-billion-a-month bond-buying program has helped prop up stock prices and keep U.S. interest rates ultra-low.
Think about this. The economy will grow at a Goldilocks rate of 3% a year, unemployment will fall – and stocks and bonds both hate the prospect. But had the Fed announced that the economy was growing too slowly and therefore the policy going forward was stepped-up QE, what would have happened? Very possibly the Japan scenario, where aggressive debt monetization spooks the bond market, which spooks stocks. Exactly the same as what we got today, in other words.
We’ll find out if this is true pretty soon when, after a few more days like today, the Fed does an about-face and says what it thinks the markets want to hear. If this doesn’t work, then the game, along with the reputations and/or careers of several thousand bankers and politicians, is finally, with poetic justice, over.
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