The Chairman’s rambling (non-answer) reply could be summarized in four words: “The Fed is trapped.” It’s trapped by Bubble Dynamics – a historic Bubble that either inflates or collapses. What the Fed labels as “markets functioning” is at this point a “functioning” speculative Bubble. And feeding this dynamic exacerbates inequality, social instability and financial and economic fragility.
Excerpts:
Can we even attempt a reasonable discussion? Someone’s got this wrong.
China COVID-19 Response Today
June 19 – CNN (Nectar Gan): “Within a matter of days, the metropolis of more than 20 million people was placed under a partial lockdown.
China is said to have mobilized its 100,000-strong infection tracing force. More than 1.1 million tests were administered in Beijing over the past week. From the UK Guardian (Lily Kuo): “Officials have ordered all residents to avoid non-essential travel outside of the capital, and suspended hundreds of flights and all long-distance buses…
USA COVID-19 Response Today
June 19 – CNBC (Berkeley Lovelace Jr.): “White House health advisor Dr. Anthony Fauci said Friday that he is frustrated Americans aren’t following recommended health guidelines to prevent the spread of the coronavirus. ‘Clearly, we have not succeeded in getting the public as a whole uniformly to respond in a way that is a sound scientific, public health and medical situation,’ Fauci, director of the National Institute of Allergy and Infectious Diseases, told CBS News… ‘And it’s unfortunate. And it’s frustrating.’”
Florida positive COVID cases surged to 3,822 Friday – almost 20% ahead of the previous day’s record infections (3,207). From CNBC: “Earlier this week, Republican Gov. Ron DeSantis said the state would not reimplement more restrictions or delay its reopening progress. ‘We’re not shutting down. We’re going to go forward…
Beijing goes to “wartime” footing with a 100-case outbreak. The U.S. on Friday reported 33,000 new infections, the largest increase in weeks. Expectations that our outbreak would follow the path of Italy, Spain and Germany were much too optimistic. The U.S. “curve” not only hasn’t declined as expected, it is turning higher. But there will be no U.S. mobilization. Former FDA Commissioner Dr. Scott Gottlieb asked the pertinent question Thursday on CNBC: “Can we keep this from getting out of control. This is a virus that wants to infect a very large portion of the population.”
The U.S. is more deeply divided today than it has been in decades. Divisions fall along political, ethnic, economic and generational lines. These lines seem to harden by the week. Part of the country will look to Tulsa this weekend with pride and enthusiasm. A segment of society will see the President’s rally as a repulsive display of ignorance and recklessness. Only in this extraordinary environment could masks become a political statement.
The Markets are “Functioning”?
Fed Chairman Powell: “What we’ve targeted is broader financial conditions. If you go back to the end of February and early March, you had basically the world markets realized at just about the same time… that there was going to be a global pandemic and that this possibility that it would be contained in one province in China, for all practical purposes, was not going to happen...
…From that point forward, investors everywhere in the world for a period of weeks wanted to sell everything that wasn’t cash or a short-term Treasury instrument. They didn’t want to have any risk at all. And so, what happened is markets stopped working.
They stopped working and companies couldn’t borrow; they couldn’t roll over their debt. People couldn’t borrow. So, that’s the kind of situation that can be — financial turbulence and malfunction. A financial system that’s not working can greatly amplify the negative effects of what was clearly going to be a major economic shock.
So, what our tools were put to work to do was to restore the markets to function. And I think, some of that has really happened… and that’s a good thing. So, we’re not looking to achieve a particular level of any asset price. What we want is investors to be pricing in risk, like markets are supposed to do.
Michael Bond’s Comment: The markets finally priced in risk and the price level was much, much lower. The Fed stepped in to buy and prop up prices. The market is no longer pricing in economic risk from the pandemic, it is pricing in the Fed’s back-stop – the greater idiot to sell to in the future.
Best question to date to Chairman Powell…
Bloomberg’s Michael McKee questions to Chairman Powell: “I came across a statistic the other day that amazed me. Since your March 23rd emergency announcement, every single stock in the S&P 500 has delivered positive returns.
I’m wondering, given the levels of the market right now, whether you or your colleagues feel there is a possible bubble blowing that could pop and setback the recovery significantly, or that we might see capital misallocation that will leave us worse off when this is over?
Second, inequality is not just about wages, it’s also about wealth, and a number of studies have suggested that by keeping rates low for so long and targeting the markets after the great financial crisis, that the Fed did contribute to wealth inequality in this country. And I’m wondering if you think there is some tweak or some message you could give that would affect that?”
Powell’s full non-answer…
Powell: “What we’ve targeted is broader financial conditions. If you go back to the end of February and early March, you had basically the world markets realized at just about the same time… that there was going to be a global pandemic and that this possibility that it would be contained in one province in China, for all practical purposes, was not going to happen. It was… Iran, Italy, Korea, and then it became clear in markets. From that point forward, investors everywhere in the world for a period of weeks wanted to sell everything that wasn’t cash or a short-term Treasury instrument. They didn’t want to have any risk at all. And so, what happened is markets stopped working. They stopped working and companies couldn’t borrow; they couldn’t roll over their debt. People couldn’t borrow. So, that’s the kind of situation that can be — financial turbulence and malfunction. A financial system that’s not working can greatly amplify the negative effects of what was clearly going to be a major economic shock.
So, what our tools were put to work to do was to restore the markets to function. And I think, some of that has really happened… and that’s a good thing. So, we’re not looking to achieve a particular level of any asset price. What we want is investors to be pricing in risk, like markets are supposed to do. Borrowers are borrowing, lenders are lending. We want the markets to be working. And again, we’re not looking to a particular level. I think our principal focus, though, is on the state of the economy and on the labor market and on inflation. Now inflation, of course, is low, and we think it’s very likely to remain low for some time below our target. So, really, it’s about getting the labor market back and getting it in shape. That’s been our major focus. And I would say, if we were to hold back because – we would never do this – but just the concept that we would hold back because we think asset prices are too high, others may not think so, but we just decided that that’s the case, what would happen to those people?
Michael Bond comment: What would happen to “those people” (if we did not prop up the financial markets)? He answers with a question. He never walks through how extreme low interest rates and high financial asset prices help create jobs and stability. Research is now showing it has the opposite effect due to mis-allocation of capital away from main street economy into the financial economy.
What would happen to the people that we’re actually, legally supposed to be serving? We’re supposed to be pursuing maximum employment and stable prices, and that’s what we’re pursuing. We’re also pursuing financial stability, but there you have a banking system that is so much better capitalized, so much stronger, better aware of its risks, better at managing its risks, more highly liquid. You have all of those things and they’ve been lending, they’ve been taking in deposits, they’ve been a source of strength in this situation. So, I would say that we’re tightly focused on our real economy goals. And again, we’re not focused on moving asset prices in a particular direction at all. It’s just, we want markets to be working. And I think partly as a result of what we’ve done, they are working and we hope that continues.”
Doug Noland’s Conclusion
The Chairman’s rambling (non-answer) reply could be summarized in four words: “The Fed is trapped.” It’s trapped by Bubble Dynamics – a historic Bubble that either inflates or collapses. What the Fed labels as “markets functioning” is at this point a “functioning” speculative Bubble. And feeding this dynamic exacerbates inequality, social instability and financial and economic fragility.
The Fed “pursuing financial stability”? It’s difficult to imagine a backdrop with greater instability. At this faltering Bubble phase, throwing Trillions at efforts to aggressively pursue employment and inflation mandates essentially destroys the prospect for any semblance of financial stability.
Original Post 20 June 2020
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