JOE BIDEN'S ENTIRE POLITLCAL LIFE HAS BEEN TIED TO BANKSTERS. THAT'S WHY BARACK OBAMA MADE HIM VP IN HIS BANKSTER REGIME
The Fed has led the way in a massive expansion of asset purchases, with the Bank of America estimating that since the global financial crisis of 2008 the world’s central banks have pumped $23 trillion into the financial system through various quantitative easing programs.
HARD TIMES ARE COMING, ECONOMIC DESTRUCTION, PRICE STICKER SHOCK WARNING,
FED SCARED TO RAISE RATES
Fed tapers asset purchases amid rising inflation and growing economic uncertainty
As expected, the US Federal Reserve yesterday announced it will reduce its purchases of financial assets each month in a tapering process that is set to conclude in the middle of next year.
Starting this month, the Fed will cut its purchases of US Treasury bonds by $10 billion followed by the same amount in December. The purchases of mortgage-backed securities will be reduced by $5 billion per month.
The Fed said, while there could be adjustments next year if warranted by changes in economic outlook, it expected there would be similar monthly reductions. This means the $120 billion per month asset purchasing program that began as a result of a meltdown of financial markets in March 2020 at the start of the pandemic would come to an end in June 2022.
In his prepared remarks for a news conference at the conclusion of the Fed’s two-day meeting, chair Jerome Powell reassured financial markets the decision to wind back asset purchases did not mean a rise in the central bank’s base interest rate—now at virtually zero—was imminent.
“Our decision today to begin tapering does not imply any direct signal regarding our interest rate policy,” he said. “We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate.”
He also made the point that even after the Fed’s balance sheet stopped expanding “our holdings of securities will continue to support accommodative financial conditions.”
The Fed now has more than $8 trillion of financial assets on its balance sheet, with its holdings having doubled in response to the March 2020 crisis.
The Fed has led the way in a massive expansion of asset purchases, with the Bank of America estimating that since the global financial crisis of 2008 the world’s central banks have pumped $23 trillion into the financial system through various quantitative easing programs.
The Fed decision, and particularly its insistence that its base interest rate was not going to increase any time soon, was warmly received on Wall Street, with the three major indexes all closing at record highs.
The S&P 500 rose by 0.7 percent, with the Dow rising by 0.3 percent to finish well over the level of 36,000, which it reached for the first time on Tuesday. The NASDAQ index gained around 1 percent.
However, it has been a different story in bond markets which have seen major turbulence over the past two weeks as fears that inflation, far from being “transitory,” as the Fed has continually claimed, is becoming entrenched.
Major hedge fund investors which bought into the Fed’s “transitory” claim have been hit by significant losses as yields in the short-term bond market rose significantly on inflation fears. Bonds have been sold off and their prices have fallen causing the yield to rise (they have an inverse relationship).
As the Financial Times (FT) reported earlier this week: “Short-dated borrowing costs have surged everywhere. US two-year yields hit 0.55 percent on Friday, their highest since before the pandemic and up from 0.21 percent a month ago.”
The numbers may be small, but in terms of bond market trading they are significant. Earlier this week, the sell-off in short-term bond markets forced the Reserve Bank of Australia (RBA) to abandon its attempt to maintain the yield on a 2024 bond at 0.1 percent when its rate in the market rose to 0.8 percent.
Faced with the prospect it would have to buy all the bonds available in the market to maintain its policy, the RBA threw in the towel.
James Athey, a bond portfolio manager at Aberdeen Standard Investments, told the FT bond markets were likely to remain “choppy” as investors were forced to abandon their bets that rates would remain low.
“A lot of people had swallowed the central bank guidance that this inflation was all transitory, and now they’ve been burnt,” he said. “You’re just seeing this bloodletting as people get stopped out of their positions, and it could go on a while longer.”
A comment on Bloomberg used stronger language. It said that hedge fund managers had watched a “nightmare scenario” playing out on the world’s bond markets. It noted that as “losses piled up” they became so big that some firms halted some trading in a bid to contain the damage.
It noted that even some of the “most sophisticated traders had been caught flat-footed by the rapid shift in sentiment” that had raced through the markets.
Shifts in the bond market are reflecting the increasing prospect of stagflation—rising prices combined with lower growth.
The yields on short-term bonds are rising in the expectation of increased inflation, while those on longer-term bonds have tended to fall, in the expectation that growth rates will decline.
With its claim of “transitory” inflation being exposed, the Fed adjusted the language of its monetary policy statement. It said the upward pressure on prices was “expected to be transitory” whereas it had said in previous statements that inflation was largely driven by “transitory factors.”
There have been warnings that the volatility in bond markets could extend to the stock market. The FT reported in an article this week on comments by Bank of America analyst Riddhi Prasad who warned that stock market investors were becoming complacent about risks.
“Equities—and equity volatility—should not miss the forest for the trees, as they’ve never been more dependent on the Fed and the Fed has never been more dependent on economic data, which itself has never been more volatile,” he said.
The Fed had “never been more uncertain on their own outlook” and this was “a precarious backdrop for such a self-confident equity market.”
The article also cited comments by a Goldman Sachs analyst there was a risk of a combined equity and bond sell-off as “growth decelerates further and inflation remains sticky.”
The uncertainty at the Fed over the direction of the economy were reflected in Powell’s opening statement.
In the first half of the year, he said, economic activity expanded at 6.5 percent, reflecting progress on vaccinations, the reopening of the economy and strong policy support. But in the third quarter “real GDP slowed notably from this rapid pace.”
Powell did not make the point, but the annualised growth rate in the three months to September was the lowest since the economic “recovery” from the pandemic recession began.
He noted that as with overall economic activity, the pace of improvement in the labour market slowed with the rise in COVID cases. “In August and September, job gains averaged 280,000 per month, down from an average of about 1 million jobs per month in June and July.”
There were “sizable price increases” in some sectors of the economy with the result that “overall inflation is running well above our 2 percent longer-run goal” and “supply constraints have been larger and longer lasting than anticipated.”
He said the tools available to the Fed could not ease supply constraints and it was “very difficult to predict the persistence of supply constraints or their effects on inflation.”
He held out the prospect that complex global supply chains would return to their normal function “but the timing of that is highly uncertain.”
US records lowest growth rate in pandemic “recovery”
The latest data from the US Commerce Department, showing gross domestic product grew at an annual rate of only 2 percent in the third quarter, down from 6.7 percent over the previous three months, is part of a global trend.
The US slowdown comes in the wake of lower growth in China, where third quarter growth fell to 4.9 percent year on year—an increase of only 0.2 percent on the previous three months—and the announcement earlier this week by the German government that it was cutting its forecast for growth this year from 3.5 percent to 2.6 percent.
This means that the world’s first, second and fourth largest economies respectively have all reported lower growth this month.
The situation is no better in the world’s third largest where the Bank of Japan this week revised down its growth estimate for the year to March 2022 from 3.8 percent to 3.4 percent. Over the longer term it said potential economic growth was “around zero or slightly positive.”
The US growth figure of 2 percent in seasonally adjusted terms was the lowest since the recovery from the pandemic recession and was well below economists’ forecasts of a 2.7 percent increase.
The main factor in the decline was the fall in consumer spending which rose at an annual rate of just 1.6 percent for the quarter compared to an increase of 12 percent in the second. Behind this was a 9.6 percent decline in consumer goods purchases which has been attributed to supply chain problems.
New vehicle sales fell by an annual rate of 68.1 percent, furniture sales dropped by 15.4 percent and sales of household appliances were down 17.7 percent. Services spending rose at an annual rate of 7.9 percent compared to an annual increase of 11.5 percent in the previous quarter.
Business spending on capital equipment also showed a decline. It fell at an annual rate of 3.2 percent in the September quarter, largely because of reductions in spending on technical equipment and transportation.
As the US economy shows signs of slowing, inflation continues to rise. The consumer price index rose by 5.4 percent in September and shows no sign of abating. When prices began to rise as a result of increased commodity prices, particularly for oil and energy, and as a result of supply chain problems, Fed chair Jerome Powell insisted the surge would be “transitory.”
But confronted with economic reality, Powell has had to adjust his assessment. Speaking at a virtual conference last week, he said: “Supply-side constraints have gotten worse. The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation.”
The Fed’s greatest concern is that the rising inflation will further fuel the developing upsurge in the working class. Powell repeated previous assurances to Wall Street that “no one should doubt that we will use our tools to guide inflation back down to 2 percent.”
The surge in inflation and the development of bottlenecks across the economy is being blamed on the effects of the pandemic.
But a different perspective was provided in a comment piece published in the Financial Times earlier this month by Jeff Currie, the head of commodities research at Goldman Sachs.
He wrote that apart from some labour issues the present bottlenecks “have little to do with COVID.” The roots of the “commodity crunch,” he continued, could be “traced back to the aftermath of the financial crisis and the following decade of falling returns and chronic under-investment” in what he called the old economy.
This was a direct result of the policies pursued after the global financial crisis of 2008 when the Fed, via its quantitative easing (QE) program, supported financial markets.
“Lower-income households faced sluggish real wage growth, economic insecurity, tighter credit limits, and increasingly unaffordable assets. Higher-income households, on the other hand benefited from the financial asset inflation caused by QE.”
This disparity in incomes hit the old economy hard. As lower-income demand fell so longer-term investment declined “in favour of short-cycle ‘new economy’ in investment in areas such as technology.” Currie did not refer to it, but he could have pointed to the massive amounts of capital that were diverted to speculation on stocks and other financial assets as well as share buybacks.
His conclusion was that “as infrastructure aged and investment waned, so did the old economy’s ability to supply and deliver the commodities underpinning many finished goods” and, after years of neglect, phenomena such as rising gas prices and copper shortfalls could be described as its “revenge.”
The European economy is also being gripped by the same forces—rising inflation and supply bottlenecks. In her press conference following a meeting of the European Central Bank’s governing council on Thursday, ECB president Christine Lagarde acknowledged these factors would remain longer than expected.
She maintained, however, that price rises were temporary as she pushed back against pressure to raise interest rates. At 4.1 percent, the annual rate of inflation in the euro zone is at its highest level in 13 years and in Germany it reached 4.6 percent this month, the highest since 1993.
In Spain the inflation surge is even stronger with prices rising at an annual rate of 5.5 percent in October, the biggest increase in almost three decades and a full percentage point above predictions by economists.
Rising energy prices, which have gone up by 18.6 percent, according to the German statistical agency, are cited as the main reason for the overall surge in consumer prices.
Lagarde said the ECB’s discussions have been focused on “inflation, inflation, inflation” and the governing council had done a lot of “soul searching” to test its analysis that it would subside.
Financial markets are already pricing in higher levels. However, Lagarde said the ECB analysis did not support raising interest rates next year “nor anytime soon thereafter.”
This stand is being driven by the fear that any interest rate rise could choke off the recovery in the euro area economy. Lagarde said while the economy continued to recover “strongly,” momentum had “moderated to some extent.”
Despite the ECB’s efforts to maintain stimulation, it may be overwhelmed by market movements. Questioned about ECB policy in the light of moves for rate tightening by the Canadian, New Zealand and UK central banks, Lagarde said such comparison were “odious” and the outlook was different in Europe.
As she spoke, financial markets, increasingly sceptical of the claim that inflation is a passing phase, were giving a different message. A comment in Bloomberg noted that the yields on five-year Italian bonds have surged in the past weeks and reached their highest level in more than a year.
The ECB, like other central banks, seeks to give the impression that it has the economy in hand but the surge in inflation, the result of forces beyond its control, is making that much more difficult.
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