Bernanke Kills Fed Credibility and the Confidence Fairy in One Shot

[marmar]

from Naked Capitalism:


Bernanke Kills Fed Credibility and the Confidence Fairy in One Shot


How many markets are in upheaval right now? The ten year Treasury has gone from 2.18% to 2.44% in less than a day. Gold is down to $1288. Asia had a bad night with the Chinese interbank market going into even more distress than before (that can’t be laid mainly at the Fed’s doorstep but it sure didn’t help). The Nikkei was down 1.7%, which is almost a routine market move, but the Hang Seng also fell 2.9%. All major European stock markets are down over 2%. S&P future are down over 16 points, or roughly 1%.

We’ve pointed to several things that have been troubling about the Fed’s apparent view prior to the FOMC statement yesterday and the Bernanke press conference, which only rattled investors further. First was that the Fed seems to be suffering from a bad case of confirmation bias, in that it seems to be underweighing data that is inconsistent with the idea that the economy is getting better (as in on the path to decent growth, as opposed to a gear or two above stagnation). For instance, even though inflation continues to fall (a sign of weakness) the central bank is taking the view that that’s temporary, and it is also of the view that the sequester isn’t going to impose a meaningful drag.

But that may not matter. Fedwatcher Tim Duy highlights the fact that the Fed has a pattern of being too optimistic about growth, but is likely to stick to its guns on exiting QE when its unemployment thresholds are breached. And the big fail is that the Fed using the headline unemployment rate as one of its main metrics for when to wind down QE means it is choosing to stick its head in the sand as far as the severity of underemployment is concerned. This is the economic version of “peace with honor”.

Frankly, the real issue seems to be that the Fed has gotten itchy about ending QE. Who knows why. It may be 1937 redux, that they’ve gotten impatient with the length of time they’ve been engaged in extraordinary measures. It may be that they can’t face up to the fact that they might have gotten into a Japan-style QE forever (I believe Japan is now on QE 8). They might also worry about political backlash if the Fed balance sheet keeps growing, or that savers and investors are suffering in a low yield environment (more likely they are concerned about depriving banks of easy profits, like real earnings on float or easy yield curve profits). John Plender suggested in the Financial Times that Bernanke may be following the view of a recent Frederic Miskin paper, in which Miskin took the view that the Fed window for a QE exit was closing. ......................(more)

The complete piece is at: http://www.nakedcapitalism.com/2013/06/bernanke-kills-fed-credibility-and-the-confidence-fairy-in-one-shot.html

[Demeter]

1. Aw...somebody burst their balloon!

Get the Fed another sucker.

They goofed. They goofed massively. They will continue to goof, until the house has fallen around their ears and somebody lops their heads off in disgust.

They keep believing in fairy tales. Well, the Real World is knocking, and the global Ponzi scheme is reaching its natural limit.

Everybody who was paying attention begged them not to go down the Japanese path. But they went anyway.

[dixiegrrrrl]

3. They goofed desperately.

Running out of room to keep any bubble going, while insistently ignoring the law of expoential numbers when it comes to debt.
Still, it was an interesting experiment in denial.

[doc03]

2. The market isn't crashing, it's just a little correction. Sorry to burst your bubble.

The market can't go down that much, there is nowhere else to put your money and get any return at all.

[golfguru]

6. Yes there is a better place for your money

Your mattress! Banks are not safe. You know what they did in Cyprus.

[doc03]

7. I retired in 2009 and rolled my 401k into an IRA. People were giving your advice then

I didn't listen and have more than doubled my money. My bank money market account pays .51%. The Vanguard MM pays nearly nothing, my mattress pays nothing. If you consider inflation you are losing 2 or 3 % per year.

[pscot]

8. The-Market-Can't-Go-Down-That-Much

I learn something new here every day.

[Fuddnik]

4. Just waiting for Larry Summers to finish off Bubble Ben's Blowout.

[doc03]

10. Notice how that market is crashing, I am sure glad

I didn't follow your advice.

[golfguru]

5. Something spooked Bernanke

But I give him credit in outing the bad news on QE now
instead of Jessica Yellen having to announce it after she is nominated.

[roamer65]

9. There is nearly zero chance of the Fed ending QE.

They stop buying bonds and the bond market will crash, sending interest rates soaring on them. The interest payments will be astronomical and either force massive tax increases or austerity to cover them. End result is cut off QE the economy is fucked.