The FOMC Decision, US Money Supply And The Economy

Giving the Kremlinologists Something to Do

As is well known by now, on Wednesday the US central monetary planning bureau finally went through with its threat to hike the target range for overnight bank lending rates from nothing to almost nothing.

Photo credit: Luca Brenta

The very next day, the effective federal funds rate had increased from 15 to 37 basis points – moreover, as illustrated by the trend in short term rates prior to the FOMC meeting, the markets had already fully anticipated the rate hike:

US 3-month t-bill discount rate and the one year t-note yield: between the October and December FOMC meetings, the markets fully discounted the impending rate hike. Once again we can see that there is actually a feedback loop between the Fed and the markets, and that it is not true that the Fed has absolutely no control over interest rates (even though the degree of its control is limited).

Of course, some markets still managed to act surprised (and/or confused), most prominently the US stock market, which is traditionally the very last market to get the memo, regardless of what is at issue. This is why asset bubbles so often end in crashes – market participants tend to very “suddenly” realize that something is amiss.

This time, the trusty WSJ FOMC statement tracker reveals that the planners have given us Kremlinologists something to do, by changing the statement’s content quite a bit. By contrast to the previous carbon copy approach, it tells a completely new story. Well, almost.

Between the October and the December meetings, the minds of the committee members have evidently experienced a great epiphany. Suddenly they have realized that the economy is indeed just awesome. This part of the statement can be safely ignored. As anyone who hasn’t spent the past century in a coma should know by now, the economic forecasts of housewives are a great deal more reliable than those of the Fed. Unfortunately the statement didn’t include the housewives’ forecast, but we can infer from Gallup’s US economic confidence index that they are probably on a slightly different page right now.

US economic confidence as expressed by people living outside of the ivory tower: in steady decline since late 2014 and firmly stuck in negative territory.

Data-dependent as they profess themselves to be, the planners appear to have neglected taking too close a look at most of the economic data that have actually been released recently – even those their own models are calculating. More on this further below.

What is most important is what they are actually up to. One decision that was easily foreseeable was this one:

“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”

This is no surprise because any attempt to actually shrink the Fed’s balance sheet permanently would crash the money supply. The deposit money created in the course of “QE” would disappear again whence it has come, namely into thin air.

Naturally, a lot of ink was spilled again on the planners’ absurd desire to debase the value of the currency by precisely two percent per year. This is so moronic in so many ways one is almost at a loss for words (David Stockman has just offered a trenchant evisceration of the Fed’s attempts to “steer” the economy, which is well worth the read). Here is a brief quote from his article: