The problem with the Federal Reserve is that sometimes the Chairman of the Fed can speak the truth without realizing what that individual said. For example (via Rstreet.com):
On Dec. 5, 1996, in what became a famous speech at the American Enterprise Institute, the then-Federal Reserve chairman implied that the stock market was suffering from “irrational exuberance.” To be precise, Greenspan put it in the form of a reasonable question:
“How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”
“I was choosing my words very carefully,” he later wrote, and “I carefully hedged what I had to say in my usual Fedspeak.” But the audience and the press got the message that he was worried that stock prices were too high.
Alan Greenspan, then Chairman of the Fed created a firestorm.
Today’s Federal Reserve statement via the FOMC is no different, yet traders are so overly bullish they failed to understand the irony of what Chairman Powell and the Fed said:
Federal Reserve issues FOMC statement
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
In other words, they don’t have a clue as to what to do.
The press conference afterwards deteriorated into a Kamalan word salad of well if this, then maybe that, or maybe this if that when this then that happens because space is big and we’ve got this.
Just what the hell.
So how does the Kamalan language translate some 20 years ago and what does this mean for this era?
Chairman Jay Powell likes to model himself and his policies after Federal Reserve Chairman Paul Volcker, however the fight against inflation that Mr. Volcker faced makes what Powell endured look like a bad joke. If Jay Powell had just continued his rate increases in 2022-2023 to a Fed Funds rate of 6.50-7% the inflationary surges would have been destroyed and a weak, if not only stagflationary six month recession occurred.
Instead, in November of 2023, as outlined in last night’s article, the Chairman elected to attempt to talk up and continue the asset bubble.
Instead of ending this bubble with a rate cut and warning about no Quantitative Easing to bail out the credit distortions, Chairman Powell elected to play the Greenspan, not Volcker route, leaving investors to believe that everything is awesome and everybody would get bailed out in the end for malinvestment.
So let us begin tonight’s rant with a historical comparison, by no means an apples to apples analysis of this era, but a reminder. From the book Age of Greed: The Triumph of Finance and the Decline of America:
Greenspan, based on his firm market principles, approved strongly of securitization and most derivative products as a way to spread risk— a view traditional market economists like Summers shared. But even when crisis struck in 2008, it was clear the Federal Reserve economists in Washington and New York did not understand how excessive and risky the borrowing now was. In particular, the relatively new collateralized debt obligations (CDOs), a way of packaging risky mortgages for investors willing to make only low- risk investments, was not understood or even investigated. Greenspan’s ultimately naive and dangerous faith in competitive markets showed itself nowhere as damagingly as in the Fed’s failure to be vigilant about the CDOs. Not only did his interest rate increases fail to dampen the financing, but they encouraged Wall Street to take more risks and mortgage brokers to write more bad loans because their profit margins had narrowed. They made up in quantity what was lacking in quality. The high dollar coupled with the trade deficit, which put even more dollars in foreign hands, which they in turn confidently invested in U.S. securities, provided ample funds. Between 2000 and 2005, according to Wellesley 246 age of greed economist Karl Case and Yale’s Robert Shiller, house prices rose faster than at any time in modern history, and the number of mortgages being written exploded.
But when Greenspan raised rates in 2004—on which adjustable rate mortgages were based— the clock began to tick. The rates on tens of billions of dollars of ARMs would be reset upward in 2006. That year, default rates on mortgages started to rise rapidly and home prices for the first time started to fall. In 2007, two hedge funds at Bear Stearns went broke and the worst credit crisis since the Great Depression got under way. In early 2008, Bear Stearns was saved from bankruptcy in a distress sale to JPMorgan Chase. In September, Lehman Brothers collapsed altogether and the Bush Treasury initiated a $700 billion bailout of commercial and investment banks. Many observers blamed Greenspan’s extreme monetary easing in the early 2000s for the debacle, making credit too cheap. But regulatory vigilance could have prevented the excesses. Greenspan would have none of it.
In the last 3 years, since the pandemic, housing prices have exploded, private securitization of debt again has accelerated under the belief that the Fed would have both public and private investor’s back, and the low interest rates would last forever.
Then the inflationary surge of 2022 hit catching Chairman Powell flat footed and the failure of the Fed to disintermediate the idea that inflation and monetary policy between their actions and inflation became apparent to everyone. The rapid increase of the Fed Funds rate, unlike Volcker’s dramatic actions of 1981, only put inflation into stasis, not allowing for a period of deflation to correct the excesses and instead embedding a higher annualized inflation rate permanently into the American economy.
Excessive speculation in cryptocurrencies, technology, REITs, and IPOs was an acceptable outcome as long as the ability of the Fed to maintain the illusion of “no irrational exuberance” was the apparent status quo.
Thus the introduction of the “Greenspan Put” in 2002 has simply been updated and re-packaged as the “Powell put” and a guarantee that asset prices can remain artificially and falsely at inflated levels if it prevented an economic contraction based on a deflationary outcome.
Unfortunately for Chairman Powell, as warned in these pages, the time to cut was in June and July of this year to provide the plausible deniability that any actions after Jackson Hole in August were made due to political circumstances, further damaging the already questionable credibility of America’s central bank.
The dependency on economic models designed to fight financial crises of 2008 and 2018 are not logical nor sustainable for the current electronic monetized environment. Monies and investments are moving faster than the Fed’s policies can track or react to, thus leaving the Fed in its traditional reactionary, post-disaster recovery mode, than able to anticipate rapid changes in the employment status or inflation/deflationary trends.
Unfortunately for the United States, much of the world has already divorced itself from the American global monetary model as the inability to trust resources and assets stored and maintained by US institutions is now in doubt.
Hence, the Fed’s inability to recognize, via their own outdated models, that a recession is about to begin, if not already this past spring as this author believes, leaves their decision making ability in doubt now just like 2007 and 2008.
In this author’s opinion it is time to prepare one’s assets accordingly to exploit the times for quick profits and long hedges against dramatic moves for declines unseen in speculative assets since the year 2000.
The first time the Fed, aka, Greenspan put failed during the .com bubble imploding.
P.S.- Interestingly enough, all searches via Google and YouTube have erased Greenspan’s AEI “Irrational Exuberance” speech. Gee, I wonder why.
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