Transcript Central Bankers Gone Wild

Central Bankers Gone Wild:
The Out of Control Fed
Daryl Montgomery
Copyright 2008
All Rights Reserved
The Liquidity Tsunami
• Rate cuts on Fed Funds of 75 and 50 basis points
on Jan 22nd and 30th respectively.
• Largest rate cut in history (why?).
• Liquidity added through the new auction facility
was increased to $30 billion from $20 billion per
auction.
• Fed funds were 5.25% up to Sept 07, now 3.00%
• Funds rate in ECB is 4.00% (euro bullish/dollar
bearish).
• Real (inflation adjusted) Fed Funds rates are very
negative. This is highly inflationary.
The Fed’s (Dismal) Record in
Fighting Inflation
• The Fed’s mission is to maximize employment while
minimizing inflation.
• In the 95 years before the Fed existed, aggregate U.S.
inflation was approximately 0%.
• In the 95 years since the Fed was created, U.S. (official)
aggregate inflation has been 1923%.
• The U.S. government has understated inflation since the
early 1980s.
• The U.S. unemployment rate in 1913 was 4.3%. The
highest unemployment rate in history was in the 1930s.
• Central Banks don’t prevent inflation, they create it.
The Fed and the U.S. Dollar
• It is not the Fed’s job to control the value of the
U.S. Dollar. The Treasury Dept does this.
• This was generally OK as long as the U.S. was on
the gold standard (up to 1971).
• Now, Fed policy can cause significant drops in the
value of the U.S. dollar and this is inflationary.
• The U.S. dollar has hit a series of all time lows
after the Fed started lowering rates in 2007 (this is
bullish for gold, silver, oil and food commodities).
What is the Fed Really Doing?
• Trying to prevent a recession in an election year
and manipulating the stock and real estate
markets.
• Since it takes 6 months for a Fed rate cut to fully
impact the economy, it is likely that the Fed will
be (mostly) done cutting rates by March.
• By the end of the year, the Fed will likely be
raising rates because of inflation.
• Up until the election, expect Fed ‘action’ any time
there is a large drop in the stock market.
Fed Intervention in U.S. Stock Market