Fed officials mobilize to reassure Wall Street
Top officials of the US Federal Reserve, starting with Chairman Jerome Powell, have pulled out all stops to reassure financial markets there will be no immediate tightening of monetary policy, and the flow of money that has sent Wall Street to record highs will continue.
Last week there was a significant reaction to the “dot plot” from the meeting of the Fed’s policy-making body, which showed expectations that interest rates could start to rise in 2023, rather than in 2024, and to subsequent comments last Friday by St Louis Fed president James Bullard, that rates may increase as early as 2022.
Markets fell sharply following his comments, with the Dow dropping by more than 500 points, and the S&P 500 recording its worst week in four months. By this Wednesday, Wall Street had returned to previous levels. But this was not due to the operation of so-called “market forces.”
The World Socialist Web Site has no information as to what discussions were held between Fed officials. But from what followed, it appears a decision was taken over the weekend that concerted action needed to be taken, lest the tremor that went through Wall Street turned into something more significant, and some “heavy hitters” were called in.
On Monday, John Williams, the president of the New York Fed, the second most important figure after Powell in the Fed’s governing body, commented that the US economy was not ready for the central bank to start easing its monetary support.
Williams said the economy was “getting better all the time” but insisted the Fed would maintain the new policy framework, adopted last August, in which it said it would allow inflation to rise above its target rate of 2 percent, before considering rate increases or pulling back on asset purchases.
“It’s clear that the economy is improving at a rapid rate, and the medium-term outlook is very good. But the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery,” he said.
On Tuesday, in the lead-up to Powell’s testimony to Congress, the president of the San Francisco Fed, Mary Daly, weighed in.
“Talking about rate changes now isn’t even on the table,” she told reporters. “The mantra right now is: ‘steady in the boat’.”
In his opening statement to Congress, Powell insisted the Fed would “do everything we can to support the economy for as long as it takes to complete the recovery” in order to make clear the Fed was not going to react to warnings of inflation by clamping down on the money supply to Wall Street.
Responding to a question from South Carolina House Democrat Representative James Clyburn, Powell said: “We will not raise interest rates pre-emptively because we think employment is too high [or] because we fear the possible onset of inflation. Instead, we will wait for actual evidence of actual inflation or other imbalances.”
Echoing issues raised by Democrat Lawrence Summers, who was Treasury Secretary in the Clinton administration and an economic adviser to Biden, Republican Representative Mark Green, prefacing a question to Powell, said: “When Congress spends trillions of dollars and the Fed prints money, something’s got to give.”
He asked whether price increases in recent months—inflation rose 5 percent year-on-year in May after a 4.2 percent rise in April—were “the start of something that could be as bad as the “70s,” when inflation was more than 10 percent.
Powell replied that such a scenario was “very, very unlikely,” sticking to the mantra of the Fed that recent price rises were “transitory,” a product of the reopening of the economy.
The price rises were “something that we’ll go though over a period. It will then be over. And it should not leave much of a mark on the on-going inflation process,” he said, during his testimony.
Congressional testimony from Fed officials always has a very large fictional component, because they can never state openly that the overriding role of the central bank is to ensure support for finance capital. Consequently, written remarks and responses to questions are couched in terms of support for the economy and serving the interests of the American people.
Powell took these fictions to new levels in his remarks to Congress. Defending the ultra-low interest rate regime, and the determination of the Fed not to make pre-emptive moves, he said the Fed was committed to an “inclusive recovery.”
“There is a growing realisation across the political spectrum that we need to achieve more inclusive prosperity. Real incomes at the lower end of the spectrum have stagnated relative to those at the top. Mobility across income spectrums has declined in the United States and now lags that of most other advanced economies. These things hold us back as an economy and a country,” he said.
But the chief factor in the ever-rising level of social inequality in the US, going back decades, and accelerating in the period of the pandemic, has been the trillions of dollars funnelled into Wall Street, boosting the wealth of the holders of financial assets.
As this week’s Credit Suisse wealth report, pointing to the further enrichment of the ultra-wealthy in the course of the pandemic, noted: “The rise in wealth inequality was likely not caused by the pandemic itself, nor its direct economic impacts, but was instead a consequence of actions undertaken to mitigate its impact, primarily lower interest rates.”
While the public “debate” over Fed policy has focused on inflation, the underlying issue for the ruling classes is not price rises per se, but the question of wages and the suppression of the growing resurgence of the working class, after decades of wage cuts.
In previous times, the Fed would have responded to such a development with a rise in interest rates, to prevent so-called “overheating” in the economy.
But this path is now fraught with danger because, such has been the build-up of debt in the US and global economy to record levels, and the development of rampant speculation financed by borrowed money, that even a small rise in interest rates from their present ultra-low levels could trigger a financial crisis.
Consequently, finance capital and its political representatives in the US and around the world are relying on the trade unions to suppress and betray the emerging struggles of the working class.
In the US, where the Biden administration has launched a historically unprecedented campaign for increased unionisation, the Wall Street Journal has been publishing almost daily comments and articles on the push for higher wages, featuring comments from employers about the need to remove supplementary COVID unemployment benefits, in order to increase the labour supply—that is, force workers to take whatever low-paying job they are offered.
The connection between the policies of the Fed, the state of financial markets and the development of the class struggle, through the push for higher wages, was highlighted in comments to the business channel CNBC by Chris Watling, CEO of the investment consulting firm, Longview Economics, earlier this week.
He said at present the Fed was resolute on sticking the course—“looser for longer, looser than they’ve ever been before—and maintaining that liquidity as much as they can, and being very, very slow to withdraw it.
“Anything that upsets that apple cart, and the labour market is a possible candidate, is a real issue ... for financial markets in the medium term, given the sort of valuation metrics that we have there.”
In other words, the resurgence of the working class could have major consequences for the financial house of cards created by the Fed and other central banks.
This connection makes clear that the role of the trade union bureaucracy, in the US and internationally, in striving to suppress and betray all independent action, is not the product of a few corrupt individuals, but the response to the deepest needs of finance capital.
nd that is the case here. The economic arms of the capitalist state are not some independent authority but function every day in the interests of the corporate and financial oligarchy, servicing its needs and interests above all else.
World’s largest asset management firm was “front and center” of Fed’s Wall Street bailout
The close collaboration between the US Treasury, the Federal Reserve and the multi-billion dollar asset management firm Blackrock in devising the March 2020 rescue operation for Wall Street has been revealed in an article published in the New York Times yesterday.
According to the article, Larry Fink, the CEO of Blackrock, the world’s biggest asset management firm, was “in frequent touch” with US Treasury Secretary Steven Mnuchin and Fed chair Jerome Powell “in the days before and after many of the Fed’s emergency programs were announced in late March.”
The extent of the collaboration is revealed in new emails obtain by the newspaper together with information that has been previously made public.
In one newly obtained email, Fink refers to planning for the rescue measures as “the project” that he and the Fed were “working on together.”
As the article notes, “America’s top economic officials were in constant contact with a Wall Street executive whose firm stood to benefit financially from the rescue,” showing “how intertwined Blackrock has become with the federal government.”
Blackrock’s close collaboration with the Fed and Treasury came at a crucial point in the development of a crisis in financial markets which began with the onset of the pandemic in March and fears in corporate circles over the response in the working class amid walkouts by workers insisting that safety measures be out in place.
The Fed responded to the initial turbulence in the markets by cutting interest rates. But these measures proved to be insufficient and the potential for a major meltdown in the markets emerged in the week ending March 20 when the $21 trillion US Treasury bond market—the bedrock of the US and global financial system—froze.
Instead of providing a “safe haven” for investors it moved to the centre of the crisis as Treasuries were sold off and no buyers could be found as the sell-off extended to all areas of the financial system.
Faced with a disaster when the markets re-opened, Mnuchin, Powell and Fink were engaged in a series of discussions over the weekend of March 21–22 to devise a rescue package. According to the Times report, Mnuchin spoke to Fink five times over the two days, more than anyone else, other than Powell with whom he spoke nine times.
One of the most significant features of the rescue measures announced on Monday March 23 was the decision by the Fed, for the first time ever, to buy corporate bonds which, as the Times noted, “were becoming nearly impossible to sell as investors sprinted to convert their holdings to cash.”
Blackrock had already closely collaborated with the Fed developing its response to the 2008 financial crisis was thereby set to play a key role in the March intervention.
The article pointed out that, while Blackrock signed a non-disclosure agreement on March 22 restricting officials from sharing information about the upcoming measures, the way in which the rescue package was devised “mattered to Blackrock.”
The decision of the Fed to buy corporate bonds and provide an underpinning for the market was significant and involved two key areas of Blackrock’s operations. One of the ways it makes profit is by managing money for clients charging a preset fee. But assets under management were contracting as investors went for cash and its business model was under threat.
Blackrock is also a major player in the short-term debt markets which were coming “under intense stress” as investors moved their holdings to cash.
Electronic Traded Funds (ETFs), which track market indexes but which trade like a stock, were also severely impacted.
In the words of the Times article: “Corporate bonds were difficult to trade and near impossible to issue in mid-March 2020. Prices on some high-grade corporate ETFs, including one of Blackrock’s, were out of whack relative to the value of the underlying assets.”
As Gregg Gelenzis, associate director for economic policy at the Center for American Progress told the Times: “This was the first time that ETFs came under stress in a really systemic way.”
In the rescue package the Fed committed itself to buying already existing debt as well as new bonds and also decided it would purchase ETFs with the result that the “bond market and fund recovery was nearly instant.”
As the Times article notes, while practically all of Wall Street benefited from the Fed’s intervention, and other financial firms were “consulted” apart from Blackrock “no other company was as front and center.”
The closeness of the relationship between Blackrock and the financial and economic arms of the state, the US Treasury and the Fed, were highlighted in a comment by William Birdthistle, of the Chicago-Kent College of Law and the author of a book on funds, cited in the article.
He said Blackrock was “about as close to a government arm as you can be, without being the Federal Reserve.”
The Fed makes every effort to cover up that relationship in order to try to preserve the fiction that it is not beholden to Wall Street and operates as an independent public authority concerned above all with the state of the economy and the welfare of the population.
The Times article recalled a news conference in July 2020 in which Powell was asked about the discussions with Fink.
“I can’t recall exactly what those conversations were,” he said, “but they would have been about what he is seeing in the market and things like that.
He said there were not “very many” conversations and that the Blackrock chief was “typically trying to make sure that we are getting good service from the company he founded the leads.”
Powell’s claim that, in the midst of the most significant crisis since the meltdown of 2008—with a potential to go even further, as the freeze in the Treasury market showed—he could not recall those conversations simply does not pass muster.
The value of every crisis, it has been rightly said, is that it reveals the real relations that are obscured and covered over in “normal” times.
And that is the case here. The economic arms of the capitalist state are not some independent authority but function every day in the interests of the corporate and financial oligarchy, servicing its needs and interests above all else.
Fed report warns of “vulnerabilities” in US financial system
The semi-annual Financial Stability Report, issued by the US Federal Reserve on Thursday, has warned that the rising debt of hedge funds, much of which is not recorded by regulatory authorities, poses growing risks for the stability of the financial system.
Key aspects of the report were highlighted in an introductory statement by Fed governor Lael Brainard, who chairs the Fed’s committee on financial stability. She noted that “vulnerabilities associated with elevated risk appetite are rising.”
The report said markets for short-term funding were now functioning normally, following the collapse of March 2020 and the turbulence of late February this year. However, “structural vulnerabilities at some nonbank financial institutions (NBFIs) could amplify shocks to the financial system in times of stress.”
In her statement, Brainard said valuations across a range of assets had continued to rise from their elevated levels of last year, with equity prices setting new highs. Relative to expected future earnings they were “near the top of their historical distribution.”
The appetite for risk had increased as the “meme stock” episode had demonstrated. This refers to the elevation of the share price earlier this year of the video games retailer GameStop, because of its promotion on Reddit and other social media platforms. This was despite the company’s business model experiencing significant difficulties.
Brainard said corporate bond markets were also seeing “elevated risk appetite” with the difference between the interest rates on lower quality speculative-grade bonds and that of Treasury bonds among the lowest ever seen.
“This combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a repricing event,” she said. In other words, a rapid downturn in one area of the market would be rapidly transmitted through the financial system.
Brainard pointed to the failure in March of the family-owned hedge fund Archegos Capital, leveraged by banks to the tune of $50 billion, and the associated losses suffered by those banks. It highlights, she said, “the potential for nonbank financial institutions such as hedge funds and other leveraged investors to generate large losses in the financial system.”
The Archegos event illustrated “the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks.”
Reading between the lines, the meaning of this statement is that the Fed is concerned that there are more Archegos Capitals out there, but it has no real idea of where they are or the level of bank exposure to them.
Brainard noted that the “potential for material distress at hedge funds to affect broader financial conditions underscores the importance of more granular, high-frequency disclosures.”
The report pointed to numbers of areas of potential instability and how it could be transmitted.
“Bank lending to NBFIs represents a potential channel for transmission of stress from one part of the financial system to another. Committed amounts of credit from large banks to NBFIs, which consist mostly of revolving credit lines and include undrawn amounts, increased in the latter part of last year and reached a record $1.6 trillion by year-end.”
Under the heading “Funding Risk,” the report said that in 2020 the amount of liabilities “potentially vulnerable to runs, including those of nonbanks, is estimated to have increased by 13.6 percent to $17.7 trillion,” an amount equivalent to about 85 percent of GDP.
It said “structural vulnerabilities” remain at NBFIs, including at money mutual funds and “regulatory agencies are exploring options for reforms that will address those vulnerabilities.”
The admission that nothing is in place at present underscores one of the key features of the financial system. Every time the Fed or other regulatory bodies attempt to put a check on, or even exercise oversight over, some of the more speculative operations, market operators devise new ways to get around them.
In setting out the near-term risks to the financial system, the report said that if the pandemic persisted longer than anticipated, especially in the event that new variants of the virus emerged, then it could derail the recovery in the US economy.
“If those developments occurred, a number of vulnerabilities… could interact with the negative shock to the economy and pose additional risk to the US financial system.”
While leverage was low at banks and broker dealers, “the leverage of some NBFIs, such as life insurance companies and some hedge funds is high, exposing them to sharp drops in assets prices and funding risks.”
It noted that, because European banks play an important role in the global financial system and have “notable financial and economic linkages” with the US, financial stress in Europe resulting from a continuation of the pandemic could also have a negative effect.
Likewise, if emerging market economies face a rise in interest rates not accompanied by an improvement in the global economic outlook, this could impact on US financial firms that have strong links with these countries and their companies.
Commenting on the Fed report, George Selgin, a senior fellow at the free-market Cato Institute, pointed to some of the inherent conflicts arising from the Fed’s policies as it continues to pump money into the financial system.
“The real story here is the tension—if not the glaring contradiction—of the Fed’s pursuit of quantitative easing (QE), the aim of which is to lower long-term rates and encourage reach for yield, and their concern that people are indeed reaching for yield,” he told Bloomberg.
The tension arises from the fact that while the stated intention of the ultra-low interest rate regime is to promote greater risk-taking through investment in the real economy—the financing of productive activity, real investment in plant, equipment and technology—the vast bulk of the money is being used to fund speculation in increasingly risky financial assets.
Selgin called for the Fed to “taper its QE activities to counter this risk-taking as the recovery continues.”
However, the financial system has become so dependent on the continued inflow of essentially free money that any move in this direction could ignite a major crisis.
Divisions emerge over central bank policies
Divisions are starting to emerge in the policy-making bodies of the world’s two major central banks, the European Central Bank and the US Federal Reserve, over the future direction of monetary policy.
The combined actions of the ECB and the Fed have pumped trillions of dollars into the financial system since the onset of the pandemic last year, but amid increasing signs of inflation and rampant speculation in commodities and financial assets there are concerns over where this is heading.
Long-simmering differences in the ECB came to the surface again this week as two leading members of its governing body put forward opposed assessments as to where the central bank should go.
On Monday ECB executive board member Fabio Panetta, who is aligned with the bank’s president Christine Lagarde, said monetary officials should retain the “unconventional flexibility” developed during the pandemic crisis and keep interest rates low.
Dismissing the prospect of rising inflation in an address to a conference of central bankers from Mediterranean countries, he said: “We do not seem to be on track to ‘run the economy hot’” and that the “slack in the economy was likely to remain large for some time.”
Governments and the public, he continued, should recognise that the present monetary and fiscal policies, aimed at providing a stimulus, were “clearly superior” to those in force before the pandemic when the focus was on reducing debt.
His remarks echoed those of Lagarde who said last week to European Union leaders that they needed to “water the green shoots” of economic recovery and it was too early to even begin talking about ending the central bank’s crisis measures.
In March 2020 the ECB launched a €1.85 trillion pandemic emergency program to support financial markets and still has just over €700 billion left to spend before it expires in March 2022.
Just hours after Panetta’s remarks, the head of Germany’s Bundesbank, Jens Weidmann advanced an opposed perspective in a speech.
Weidmann, who leads a group of northern European representatives in the ECB who have been critical of the ultra-loose monetary policies, said there were “upside risks” for the inflation outlook and the central bank’s stimulus program should end “as soon as the emergency situation has been overcome” and 2022 will not warrant designation as a “crisis year.”
As the Financial Times noted: “His remarks set up a clash with other members of the central bank’s governing council about the future path of its policy.” The ECB is set to announce the future direction of its policies in September.
On the other side of the Atlantic there are also signs of divisions in the leading bodies of the Fed over whether the present level of financial asset purchases, running at $120 billion a month, should be eased back.
Despite the predictions by some Fed members that interest rates should start to rise in 2023, as opposed to previous forecasts of 2024, Fed chair Jerome Powell has insisted that the present policies will remain in place until there is “substantial further progress” in meeting the Fed’s goals. He has maintained that the spike in inflation, which saw prices rise by 5 percent year-on-year in May, after a 4.2 percent rise in April, is “transitory.”
But the escalation in house prices in the US has led to calls from some Fed members that the purchasing of mortgage-backed securities (MBS), running at $40 billion per month, should start to be wound back.
On Tuesday it was revealed that house prices had risen by a record amount. The S&P CoreLogic Case Shiller national home price index, which measures house prices in major metropolitan areas rose 14.6 percent in the year ending in April, the highest level of annual growth since the index was started in 1987. This followed a report by the National Association of Realtors that the median price for an existing house had risen by 23.6 percent in May from a year earlier.
In an interview with the Financial Times published on Monday, Eric Rosengren, the president of the Boston Fed, expressed concerns about the implications of the boom in house prices.
“It’s very important for us to get back to our 2 percent inflation target but the goal is for that to be sustainable. And for that to be sustainable, we can’t have a boom and bust in something like real estate.”
The house price boom, which is reflected in Europe, as well as in Australia and New Zealand and elsewhere, has been fuelled in large measure by the ultra-low interest policies of all central banks.
With the subprime crisis of 2007–2008 no doubt in mind, Rosengren recalled that “boom and bust cycles in the real estate market have occurred in the United States multiple times, and around the world, and frequently as a source of financial stability concerns.”
Rosengren said that when the purchasing of securities was eased, mortgage-backed securities would have to be included in the reduction.
Others have gone further. Dallas Fed president Robert Kaplan has said that MBS purchases should end “sooner rather than later” because of the rise in the housing market, and the St Louis Fed president James Bullard has also called for the Fed to re-evaluate its support for the housing market because of concerns that a bubble was developing.
While Powell has not entered the debate some of his supporters have. San Francisco Fed president Mary Daly told reporters that MBS purchases were “not directly affecting” the interest paid on mortgages.
According to a report in the Wall Street Journal, Powell and other Fed officials are reluctant to specifically target the MBS market for a reduction in purchases because it would “suggest the Fed is using monetary policy to address a concern about the stability of the financial system arising from elevated house prices.”
In May, a key Powell supporter, New York Fed president John Williams pointed to the broader effects of the MBS program which had “pretty powerful spillovers into other financial conditions such as corporate bond rates and other similar kinds of securities.” He underscored that assessment in further comments last week that Fed MBS purchases are not “specifically tied to the housing market.”
Another aspect of the speculation set off by the ultra-cheap monetary policies of the Fed and other central banks is evident in commodities markets.
Bloomberg has reported that its Commodities Spot Index, covering 22 raw material processes is up 78 percent from its March 2020 low. The price of oil is now $75 a barrel amid predictions it could return to $100.
Bloomberg reported that commodity traders who poured in cash had been “showered” with money. Cargill, the world’s largest trader in agricultural products “made more money in just the first nine months of its fiscal year than in any full year in its history” with net income going over $4 billion. The Trafigura Group, a major oil trader, posted a net profit of $2 billion in the six months to market, nearly as much as it had made in its previous best-ever full year.
The chief concern of the central banks and governments around the world, as these price hikes are already being translated into high consumer prices, is that inflation will fuel the drive of the working class for higher wages. Consequently, while continuing to pump money into the coffers of the financial elites and promoting speculative bubbles, they will be ever more directly relying on the trade union apparatuses to suppress this movement.
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