The Fed’s Funny Money is Losing its Mojo

Oh dear. Today we learned a valuable lesson: just because you’re not fighting the Fed doesn’t mean you should be in bed with it, or trust it, or otherwise put your financial fate in the hands of fickle, feckless, and duplicitous central bankers.

The Australian share market has opened with a sea of red numbers after yesterday’s action in New York. US stocks fell the most they’ve fallen since November of last year. And they were getting so close to making new all-time highs. What caused the stampede of selling? It was the Fed.

Specifically, the minutes from the Fed’s January meeting. If you have a vivid imagination, they make for good reading. You can just imagine a bunch of well-heeled bankers, under the illusion they are pulling all the right levers and turning all the right dials, arguing with each over biscuits and coffee. There is dissension in the ranks over further asset purchases. Let’s go to the notes, with our own emphasis added, to show the confusion and dissent:

‘Many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behaviour that could undermine financial stability

‘Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved[…] A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labour market had occurred. Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labour market outlook had occurred[…]’

To credit junkies who base their stock market decisions on front-running the Fed, this kind of talk is enough to make your knees knock. Is the Fed seriously considering winding back its asset purchases? Is it losing its nerve? Is it less committed to the idea that pumping up stock prices reduces unemployment?

Well, if you were being cynical (realistic), the thought might occur to you that low interest rates have always been about pumping up stock prices and lowering the cost of government deficits. The whole business about lowering unemployment through cheaper credit is just a line to feed to the proletarian mugs. Let them eat low rates!

Maybe the Fed is worried about creating another asset bubble. But here’s a newsflash, it’s too late! The volatility index (VIX) spiked yesterday as surprised investors realised they’re playing the Fed’s pump and dump game. It’s Bernanke’s world for now, and we’re all just along for the ride.

Dan Denning
for Markets and Money

Dan Denning
for Markets and Money

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Markets and Money

Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets.

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3 Comments on "The Fed’s Funny Money is Losing its Mojo"

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Come on Dan. These news stories about the Fed deliberating are designed only to shake up the market and crush retail hopefuls. Maybe the markets can do almost anything with banks having access to the Fed discount spigot but the QE has to keep going. Who else is going to pay the military, teachers etc etc etc etc….tax revenues? Or will we just let it collapse and allow people to learn to be government loathing self reliant types again. Oh God no!
Mother government must keep lactating.

small cap

$85 billlion per month and all you get is an anaemic ‘recovery,’ I would like to see what sort of recovery they get without it. What does that equate to per job, hell, has to be cheaper to pay the unemployed $10k/mth each not to get a job.

Spot on ‘small cap’ but those idiots ‘in charge’, don’t know what they are doing, except looking after their mates of course. We have a situation in England where the retailers association is crying about poor trading results, and having to pay high rents. Now they want some sort of relaxing of costs and taxes, a ‘bailout’ paid for by mug taxpayers. It hasn’t dawned on them that its customers they want, and a walk down any high street or mall will tell them, no one is buying; they don’t have the money. But that won’t stop Cameron from throwing… Read more »
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