Tag Archives: Federal Reserve policy

The ‘Stealth Pivot’, by Bill Bonner

It wouldn’t be the first time the Fed swore it would do one thing and then did the opposite. From Bill Bonner at bonnerprivate research.com:

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina…

What a week! Another exciting mix of the absurd, the ominous and the sublimely ridiculous.

The most important thing that happened was that the Fed revealed more of its  ‘stealth pivot.’ It came out with a program to bail out the big depositors of failing banks. Already, the FDIC insures the deposits of small account holders (under $250,000). Now the new alphabet group – BFTB, or something like that – is going to look after large account holders. In other words, the whole banking system is being nationalized.

Well, not exactly. The losses are being nationalized. The profits will remain with the bankers.

What’s behind it? We recall our old friend Richard Russell:  

‘The feds can control the banks to a large extent. They can control the bond market, to some extent. They can control the stock market, also to some extent.  They can cause booms and trigger busts. But they can’t do those things and also control the value of the currency. The dollar is the pressure value. It suddenly pops open when the system needs a reset.’

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Occupy Wall Street Redux, by MN Gordon

Maybe setting up a state-sanctioned banking cartel wasn’t such a good idea after all. From MN Gordon at economicprism.com:

“The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.”

– John Steinbeck, The Grapes of Wrath

Negative Carry

Borrowing short and lending long works mostly well most of the time.  This is how modern banking works.  You may be a customer at a bank.  But you also supply the product.

In short, a bank will pay you a small percent for the deposits in your checking and savings accounts, which you can withdraw at any time.  This is the borrowing short side of the operation.

The bank then takes your deposits and invests the money in some longer-term assets, such as loans and bonds that aren’t paid back for years.  Say the bank earns 2 percent on its money while paying depositors a fraction of a percent.  The bank pockets the spread, the net interest margin.  Easy money.

However, when the Federal Reserve intervenes in the market and presses the federal funds rate to zero and holds it there for 2 years (March 2020 to March 2022), driving yields across the range of maturities to 5,000-year lows, something bad is bound to happen.

The experience for consumers over the last 24 months has been raging consumer price inflation.  But that’s only a small part of the bad stuff that can happen.

Because as the Fed jacked up the federal funds rate starting in March 2022, to contain the consumer price inflation of its own making, the yield curve has inverted.  Short term yields are higher than long term yields.  And banks, having borrowed short to lend long, have negative carry.

Perhaps it would all works out for the banks if depositors stayed put.  But in a world where you can score nearly 5 percent from Treasury Direct – with no brokerage fees – why keep excess deposits in the bank when you only get a fraction of a percent?

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What Comes After the Great Liquidation, by MN Gordon

Do rising interest rates break inflation or the economy and financial markets first? From MN Gordon at economicprism.com:

Expectations were great.  When 2023 started, there was a general sense that the stock and bond markets had turned over a new leaf.  A repeat of 2022 was out of the question.

The primary assumption was that inflation would relent.  After that, everything else would neatly fall in line.  Specifically, interest rates would decline, and the next great stock market boom would bubble up just in time to bailout the meager retirement savings of aging baby boomers.

That was the general outlook when 2023 commenced.  But instead, the opposite is now happening.  Inflation is persisting.  Interest rates are rising.  And stock and real estate prices are headed down, down, down.

This week, for example, Fed Chair Jerome Powell, in his semi-annual Congressional testimony, clarified that interest rates would go “higher than previously anticipated.”  He also noted that, if needed, he’s “prepared to increase the pace of rate hikes.”

In other words, the much-anticipated Powell pivot has gone on indefinite hiatus.  You can fight the Fed and buy stocks if you must.  But you won’t likely be very happy with the results.

Moreover, Fed rate hikes are only part of the story.  To be clear, the Fed’s rate hikes are to the federal funds rate.  However, they do, in fact, influence Treasury rates.

Since March 2022, the Fed has hiked the federal funds rate from a target range of 0 to 0.25 percent to a range of 4.50 to 4.75 percent.  As a result, and over this duration, the 2-year Treasury yield has jumped from 1.75 to over 5 percent.

What to make of it…

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Banking Institutions Quietly Admit To Inevitable Recession Implosion In 2023, by Brandon Smith

Is the Fed deliberately causing a financial and economic crisis? From Brandon Smith at alt-market.com:


As the Federal Reserve continues its fastest rate hike cycle since the stagflation crisis of 1980, a couple vital questions linger in the minds of economists everywhere – When is recession going to strike and when will the Fed reverse course on tightening?

The answers to these queries are at the same time simple and complex: First, the recession has already arrived. Second, the Fed is NOT going to reverse course, though they will probably stop tightening for a time.

The technical definition of a recession in the US is two consecutive quarters of negative GDP growth. We already experienced that in 2022, which led the Biden White House and puppet economists within the mainstream media to change the definition. The Federal Reserve also ignored deflationary signals throughout the last year and evidence suggests the central bank along with the Biden Administration even tried to hide the downturn with false employment numbers.

For a few years I have predicted that the establishment would shift into a monetary tightening phase and they would continue with interest rate hikes and balance sheet reductions until markets break and the system destabilizes. That prediction has proven accurate so far, and the evidence shows that elements of a financial black hole have already been created.

The St. Louis Fed has quietly published data indicating that the US is now entering a recession. This admission was posted right before the new year, clearly as a means to avoid wider media attention. The news also comes not long after the Philadelphia Fed revised their 2nd Quarter labor growth numbers, erasing a whopping 1 million jobs from their original estimates.

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If Red States Want Protection From Collapse They Will Have To Build Alternative Economies, by Brandon Smith

If you’re relying on the federal government to make you anything but more miserable when the apocalypse comes you’re bound to be disappointed. Think local. From Brandon Smith at alt-market.com:

Economic centralization is the ultimate form of organized conspiratorial power, because it allows a small group of people to dictate the terms of trade for a society and therefore dictate the terms of each person’s individual survival.

For example, the Federal Reserve as a banking entity has free rein to assert policy controls that can disrupt the very fabric of the US economy and the buying power of our currency. They can (and do) arbitrarily create trillions of dollars from thin air causing inflation, or arbitrarily raise interest rates and crash stock markets. And according to former Fed chairman Alan Greenspan, they answer to no one, including the US government.

I have started to see a new narrative being spread within mainstream media platforms as well as alternative media platforms suggesting that the Fed is necessary because it is working to “counter” the agenda of Joe Biden and the Democrats. Some people claim the central bank is “protecting” America from the schemes of the UN and European interests.

This is perhaps the most moronic theory I’ve ever heard, but it makes sense that the central bank and its puppets would be trying to plant the notion that the Fed is some kind of “hero” secretly fighting a war on our behalf. The money elites associated with the Fed have inflated perhaps the largest financial bubble in the history of the world over the past 14 years. They did this with bailouts, they did this with QE, they did this with covid pandemic checks and loans, and now the bubble is popping. They know it is popping, because they WANT it to pop.

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The Disease Or Cure? Take Your Pick! (Part II), by Dennis Miller

Not addressing the disease means there will be no cure and the disease will continue, but the cure’s going to hurt. From Dennis Miller at milleronthemoney.com:

Disease and Cure Green Road Sign with dramatic clouds and sky - The Disease Or Cure? Take Your Pick!

Last week we discussed the consequences of continued high inflation. It will bring economic devastation, the dollar would lose its status as the world currency, the destruction of the middle class, and likely another Great Depression.

Chuck Butler outlined what happens if the Fed flinches and doesn’t do what needs to be done – quickly:

“Soon after the Fed Heads will turn around and cut rates, print currency, and start the whole shootin’ match over again.

…. Bottom line, they will attempt to get the economy going and the mess will eventually get bigger –

Dennis, they call that ‘stagflation.’ Basically, it’s the Fed trying to burn the candle at both ends and making things worse.”

In the early 1980’s Fed Chairman Volcker, saw high inflation and worried the dollar would lose reserve currency status. He raised interest rates to almost 20%.

Fred Chart Federal Funds Effective Rates 1980s

He raised interest rates to 15%, cut them back to 10%, and then raised them to 17.5% – kept rates high until inflation got under control. He solved the problem, but times were tough!

Recently Fed Chairman Powell said:

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

…. We will keep at it until we are confident the job is done.”

What happens if the government and Fed make the tough choices to get inflation down to their 2% target?

CNBC reports:

“The Federal Reserve on Wednesday enacted its second consecutive 0.75 percentage point interest rate increase as it seeks to tamp down runaway inflation without creating a recession.

…. The moves in June and July represent the most stringent consecutive action since the Fed began using the overnight funds rate as the principal tool of monetary policy in the early 1990s.

…. The fed funds rate…feeds into a multitude of consumer products such as adjustable mortgages, auto loans and credit cards. The increase takes the funds rate to its highest level since December 2018.”

The Fed followed with another 0.75% increase.

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Powell’s “Pivot” and the Top 10 Signs of an Impending Recession, by Jon Wolfenbarger

Recession is the betting favorite among possible pending economic outcomes. Indeed, it’s probably already won. From Jon Wolfenberger at lewrockwell.com:

Jay “the inflation we caused is transitory” Powell finally did it.

On Friday, the Fed Chair finally mustered the courage to say that he is going to do the job he has been hired to do: the Fed will not “pivot” to cut interest rates until inflation slows meaningfully and persistently — even if the stock, bond and housing bear markets become much worse and the economy goes into recession.

The stock market reacted with its biggest decline in over two months, with the S&P 500 falling 3.3%.

Powell’s Speech Translated

Below we provide key quotes from Powell’s Jackson Hole speech, along with our honest translations:

“Today, my remarks will be shorter, my focus narrower, and my message more direct.”

This was indeed one of the shortest and clearest Fed speeches in history. Powell wanted everyone to understand, in no uncertain terms, the damage they intend to inflict on financial markets and the economy.

“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.” 

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Now Everyone is Afraid of Jerome Powell, by Tom Luongo

It looks like the markets have come to a realization that Jerome Powell will continue raising the federal funds’ target come hell or high water. From Tom Luongo at tomluongo.me

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There is No Pivot, Only Zul, by Tom Luongo

Tom Luongo bucks the consensus and says the Fed will keep tightening come hell or high water. From Luongo at tomluongo.me:

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David Stockman on the Banking Ponzi Scheme That’s Savaging Depositors

Banks are not paying enough interest to compensate good old-fashioned savers for the depreciation of their dollars due to inflation. From David Stockman at internationalman.com:

Banking Ponzi Scheme

The toxic effects of the Fed’s relentless interest rate repression are many, but among the worst has been the absolute savaging of bank depositors.

Interest rates on 12-month CDs (under $100,000) dropped below the inflation rate in October 2009 and have been pinned there ever since.

There is no other word for this than “expropriation” — an unconstitutional taking of property from tens of millions of households that needed to keep their funds liquid and didn’t wish to roll the dice in the junk bond market or stocks.

Worse still, the resulting vast transfer of income from depositors to banks has resulted in an egregious, artificial ballooning of bank profits and stock prices.

For instance, the combined market cap of the top six US banking institution — JP Morgan, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs — has risen from $200 billion at the bottom of the financial crisis during the winter of 2008-2009, where it reflected their true value absent government bailouts, to $1.5 trillion recently.

That 7.5X gain, which was 100% orchestrated by the Fed, is an unspeakable gift to the wealthy who own most of the stocks and especially to top bank executives who have cashed-in on vastly appreciated options.

Needless to say, this massive bubble in banks and other financial stocks is unsustainable. When the Fed is finally forced to shut down its printing presses, the bank stocks will be among the first to dive into the abyss.

While this might represent condign justice from a policy and equitable point of view, the extent of the harm to everyday Americans cannot be gainsaid.

That’s because Wall Street is going for one more bite at the apple, claiming that the currently accelerating rate of inflation is good for bank stocks.

Consensus stock price forecasts for JPMorgan are up 20% by 2023 and for Goldman Sachs by 70%.

Needless to say, this is just another 11th hour lure from big money speculators looking to unload vastly overvalued stocks on unwary retail investors.

Accelerating inflation supposedly portends higher growth and loan demand, but that’s a complete humbug because what we actually see in the market is stagflation. And that will cap loan demand even as it squeezes net interest margins, causing bank earnings to fall big time.

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