Wednesday, December 3, 2014

Still Riding the Wave? Fed Official Warns Of a Potential Collapse. The Fed’s reputation is on borrowed time.

December 03, 2014

"Fed Official Warns Of a Potential Collapse

The Fed’s reputation is on borrowed time.

Much of the so called “economic recovery” that began in 2009 has been based on the Fed’s credibility as a Central Bank to rein in the collapse.

However, at this point even the financial media has begun to realize that the Fed has elevated asset prices (stocks, homes, etc.) and nothing else. Incomes have not moved in line with stocks nor has GDP growth nor has the employment picture.

Put another way, everyone now realizes that the Fed has boosted stocks and don’t little else. This has lead some to accuse the Fed of targeting the markets rather than boosting the economy (see the recent wave of legislation meant to increase Congressional oversight of the Fed being introduced in Congress).

The Fed isn’t doing itself any favors in terms of defending its track record.

Enter Bill Dudley: former Goldman Sachs bank turned NY Fed President.

Dudley made a speech yesterday regarding the Fed’s policies. Early on he states that when the Fed starts raising rates, it will gauge the market’s reaction closely to see how the financial system adjusts:

First, when lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves.  If the reaction is relatively large—think of the response of financial market conditions during the so-called “taper tantrum” during the spring and summer of 2013—then this would likely prompt a slower and more cautious approach….

A few minutes later, he claims the Fed doesn’t care about stocks or bond yields or other items… the very same “conditions” he claimed the Fed will pay close attention to just a few moments before…

Let me be clear, there is no Fed equity market put.  To put it another way, we do not care about the level of equity prices, or bond yields or credit spreads per se.  Instead, we focus on how financial market conditions influence the transmission of monetary policy to the real economy

Suffice to say, Dudley is aware that the Fed is now considered to be a stock market prop and nothing else. The fact he is trying to explicitly dissuade the markets of this belief says a lot about the Fed’s thinking on this topic (read: we need to distance ourselves from the markets).

Between this and Fed #2 Stanley Fischer’s statement that the Fed’s primary concern is on when and how to raise interest rates, stocks are on borrowed time. Not only will rates be rising in the next 12 months, but even the biggest stock cheerleader at the Fed (Dudley) is now trying to break the belief that the Fed is an “equity market put”

Stocks are on borrowed time. The next round of the Financial Crisis is approaching."

Graham Summers, Phoenix Capital Research

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