Fed adheres to 'jawbone' standard

When it comes to monetary policy, our Federal Reserve is hoping words speak just as loud as actions.

By Bill_Fleckenstein May 24, 2013 5:40PM

Federal Reserve Chairman Ben Bernanke (© Manuel Balce Ceneta/AP)It's time once again to check in on our fearless leaders at the Federal Reserve, as Wednesday was the scene of Chairman Ben Bernanke's most recent congressional testimony (as well as the release of the latest FOMC minutes).

 

Spoiler alert

But we already knew -- regardless of what Bernanke or the minutes said -- what the Fed is going to do, namely what it has always done since former Chairman Alan Greenspan manned the helm. This is not debatable: The central bank is going to print money -- too much money, it as it will turn out, and the central bankers won't understand that -- leading to a collapse in the economy and financial markets, and so the Fed will come back and do the same thing on an even bigger scale.

 

For five years now, there has been steady talk of exit strategies, yet none has occurred. Nor is exiting described as a binary on-off switch any longer, but rather as a dial whereby the flow of money can be scaled up or down, depending on the data.

 

Thus, the very concept of an exit strategy, where the Fed might suddenly stop buying or actually sell bonds and reduce its balance sheet, has been abandoned and is never going to happen.

 

This makes it rather annoying and maddening to deal with financial markets that move on every speech given by every Fed head as they work their jawbone standard. But that is where we are.

 

Fed won't hit the brakes until it's sure we've hit something

No one should be shocked to learn that Bernanke opened Wednesday's testimony by saying that a premature tightening risks slowing or ending the recovery.

 

That is all you need to know: There will be no premature tightening. Bernanke is not going to pre-empt anything, certainly not inflation.

In fact, he said, ". . . inflation, if anything, is a little too low."

 

All of the tough talk, I believe, is because the powers that be at the Fed have some inkling somewhere in the back of their minds that maybe if they "overdo it," financial markets might get a little (in Fed terminology) overheated.

 

Other than that, they have no interest in ending their massively stimulative policies in any time frame that could remotely be called early.

In any case, when the Bernanke headline hit the tape, everything vaulted to the upside. Then, during the question-and-answer period with lawmakers, Bernanke said he could raise or lower the purchase pace of Fed bond buying (gee, what a shock), depending on the data (ditto).

 

But then he dropped a supposed bombshell, noting that the Fed could cut the pace of bond purchases at one of its next few meetings (yes, slowly, or maybe not at all). That comment caused a great deal of selling in the bond, currency and metals markets, but it initially had only a modest impact on the stock market, which eventually sank with everything else.

 

Hanging ourselves on every word

The bottom line is that this is a whole lot of hot air, but we are forced to deal with it on a daily basis because we live in a world where central bankers think they know the future and the only standard that exists anymore is the jawbone standard.

 

(And, most importantly, the damage from money printing has already been done, the consequences just haven't yet fully manifested themselves.)

 

Are bonds u-ZIRP-ing control?

Bonds were deservedly smoked on Wednesday, and yields are approaching their highs of the year. If they keep sliding, stocks will get hit (though they could tank for any reason now, given how frothy the market is) and then the economic data will be seen for what it is: weak.

 

Of course, "taper talk" would then cease and folks would realize that the Fed is (and has been) trapped. You can't abandon zero-interest-rate-policy (aka ZIRP) until the market forces you to via a funding crisis. Period!

 

At the time of publication, Bill Fleckenstein owned gold.

59Comments
May 24, 2013 10:39PM
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This coming collapse will only be noted, after the fact. The Mainstream Media will do little to nothing to prepare folks for the coming storm. Most of them live in paid off Mega Mansion so most of them really don't care about the average Joe or Sue. Bill has done an excellent Job of educating folks about what is happening. I get that since he doesn't predict the exact date and maybe has been calling what some might say wolf, some folks prefer to bash him.

It's hard to be right when fundamental what you say is correct but the Global Feds are behaving fundamentally wrong. You can be a bear and still pick certain stocks. Being a bear doesn't mean you are just sitting on the sidelines. Just about everything Bill has talked about is dead on. However that won't make the markets move up or down. Far too much funny money for that to happen. Funny money that just keeps on growing without end.

May 24, 2013 11:47PM
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If the economy is doing so well, how come we can't fix our bridges before they fall down.  Why is the city of Detroit trying to sell their art museum?  The stock market may look great now, just like right before the housing bubble.  The fact is now we can't pay our cities and state pensions without massive cuts and who wants their pension cut in the first place?  

There is no end game.  It's not a game, but our children's future on the line.  Our generation really messed it up for the next generation.  
May 24, 2013 8:35PM
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I agree completely. At this point, America can only view Ben Bernanke and the Federal Reserve as terrorists destroying our nation in many ways. The dilution of the dollar will strangle the economy and the over-printing has already created too much wealth without prosperity. Sadly, our government is too broken to react. Carl Levin's Senate sub-committee meeting needed to require FACTS, not data, from Bernanke. We aren't privy to the finite details but a failure is eminent now. I doubt that the nation has a chance of sustaining past September with the idiot pumping $85 billion monthly into markets that do not help America. I honestly feel it will end violently for Central Banks and the aftermath will be brutal on a Kool Aid addicted world.
May 25, 2013 12:28AM
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Let's talk immigration:  Since when does breaking the law in the first place give people the right to anything.  The U.S. Government failed a long time ago not enforcing the laws we already have in place.  

If you break the law in the first place, only fair thing to do is leave and get in the back of the line and wait like everyone else.  No short cuts to the front of the line, just follow the rules and laws and wait your turn.

Living in the U.S. and working in the U.S. wrongfully breaking the law is not fair to everyone that should and do follow the rules and law of immigration.  Two wrongs don't make a right.  

Off topic I know.  Point is, without rules and laws there is only chaos.
May 25, 2013 9:12AM
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Ben Bernanke and the Federal Reserve's endless printing of money and Zero Interest Rate Policy (ZIRP) is enabling the Federal Government to be a reckless spender of money because there is absolutely no interest payment pain felt by the Federal Government. He is also enabling the Federal Government to over-regulate and over-tax business, Obamacare being the latest and greatest weapon of mass destruction of business.

Ben Bernanke et al enable the Federal Government to do these things because the Federal Reserve policies create the false illusion of a recovering economy, instead of the reality of just creating bubbles in the stock, bond and housing markets.

May 25, 2013 11:01AM
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What about the American people and their purchasing power. They are 70% of our economy, as inflation eats into purchasing power they will and are cutting back on spending,
May 25, 2013 6:13PM
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What the Fed has done is print sooooooo many dollars for a long time, currencies and int'l bonds will begin to collapse until dollar conversions, and international markets will begin to weaken.  Is Japan first?  Watch the strong dollar work overseas.  Australia next on stress list?  China?  Sovereign funds are in full retreat.  Buy gold for hedge?
May 25, 2013 7:07PM
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Concerning China: There is a article titled, "Despite Curbs, China's vast hot money triangle Flourishes"

If you read that article, you will begin to see why some folks have major concerns about that part of the world.

We all know about the Bank of Japan and their $1.4 Trillion dollar stimulus plan.
We all know about Uncle Ben and his $85 Billion a month in asset buying.

This is all a collective effort to continually feed the Rich while starving the poor. How anyone can think this is a good thing, is beyond reason. Bill has been right for quite some time, too bad he doesn't get nearly the credit he deserves for sounding the Alarm Bells.

May 27, 2013 10:22AM
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The real problem is the lack of jobs. Neither the Democrats or Republicans will do what is necessary to stop the outsourcing of jobs, tariff cheap goods made overseas so those jobs come back to America. I am a small business owner and I can tell you that the number one expense in all businesses is labor. I can also tell you that there is no way you can compete with $1 an hour wages (see China). The new business model (Walmart, Home Depot ect.) is have China produce a product as cheaply as possible (it's crap) then import it, mark it up, and hire part time $8 hour (no benefits) employees to stock the shelves and help sell it. This race to the bottom is fully supported and encouraged by BOTH political parties. Until the American people realize this and demand change, nothing will get better, only worse.  
May 26, 2013 11:28AM
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Bills article as in his past writings warn of a coming catastrophe.   When it begins to unfold everyone will know, it will be bad, very  bad.  Watering down of currency will lead to eventual financial ruin.  Government needs MORE taxes, why?  Because the value of the dollar is so low, it can't buy the goods and services it once did.  All levels of government, Federal, State, Local need more revenue for this very reason.  When will the collapse happen?  The next risky investment collapse?  The next major slowdown in the economy?  We actually have never recovered from the last slowdown, wages are stagnant or falling, jobs are relegated to part time.  Many skilled workers have 2 jobs to make a work week.  Workers and young people struggling to make ends meet at $50K annual salaries are indicators of how bad things are.   
May 26, 2013 4:40PM
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Too bad none of these so called experts have any idea what to do. All they do is smooze their way into the jobs through their networks and blame someone else when the plan fails.
May 25, 2013 7:18AM
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"That's why states and communities are suffering financially. Wall Street funds the de-industrialization through [steerage], yes, your investments, looking for those returns- you lose in the long run."

 

Pardon me for modifying your quote, Derfy. Better to abolish and eliminate all the veils of anonymity and illuminate crooked administrative and financial terrorists. Better to tear down the few losers controlling and manipulating our country, then to push our country into a new civil war. Wealth has to go down. We need jobs, they didn't hire, now they must leave or be eaten.

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Pretty the end of the US economy is going to be some time before June 22 , 2015 

The exact hour and minute is yet to be determined. 

Obama Care alone next year may be enough to sink the US 


May 28, 2013 10:02AM
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The spigot is wide open, the bubble continues to swell....but all bubbles will find a place to pop
May 28, 2013 12:53PM
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They have no plan except blame it on the next guy.
May 24, 2013 9:45PM
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The Fed money printing is on the back of the taxpayer who is funding collapse. Google what Germany did after WW1 this is what's going on here. Even to the point of deindustrializing the USA no manufacturing lost tax base. That's why states and communities are suffering financially. Wall St helped fund the deindustrialization thru investment and yes your investment, looking for those returns you loose in the long run. You'll pay higher taxes, way to go! I suggest prep but do what you want I'm prep'd.
May 28, 2013 10:51AM
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It's a real bummer Bill....I'm one of few that got out of Stock Market at 13k Dow and have been on the sidelines since...watching the unbelievable rise and drop in metals. Many think they will be able to safely exit the stock market when the stimulus is over...that has yet to be determined. Myself, I'll keep focused on what the smart money is doing...buying physical gold. I am not wong in my action...I'm usually on the winning side. Yes, it's painful for me now...but in the long run...I'll win this monopoly game fair and square. (while I feel the cheats all around me) They can't keep QE-ing and propping-up the stock market forever...it will come down in a great fall...or great dollar devaluation.
May 28, 2013 12:04PM
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This coming collapse or better yet how perpare and prevent the coming collapse. pay down deb and have one mouth worth of money out side the banks will do alot help the economy. alot economic slow downs are dew imbalance of spending to saving. more saving can reduce imbalance and delayed and reduce impact of next economic down turn.  also by saving more you are also forcing more sound investments.  
May 28, 2013 12:34PM
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I guess Bill is kind of like a broken clock. He is bound to be right at some point.
May 28, 2013 7:01AM
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He has this thing for the Federal Reserve.  One has to wonder if he worked there and got fired or something.  So tired of him and his nothing of substance writing.   
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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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