Back in 1913, Congress established the three key mandates for the Federal Reserve: to maximize employment, stabilize prices, and moderate long-term interest rates.
But that’s so 20th century….
Today’s Federal Reserve, under the rule of Janet Yellen, seems to have just one mandate: to please the Wall Street speculators.
Former Dallas Fed official Danielle DiMartino Booth calls the Fed’s current policy “quantitative pleasing.”
For evidence, you don’t need to look any further than this chart, put together to show how the growth in the Fed’s balance sheet is in lockstep with gains in the S&P 500 Index:
Thanks to Calamity Jane(t), the Fed’s QP policy continues to fuel the U.S. stock market, despite the fact that we’re in a “profits recession.”
How Not to Run Monetary Policy
Even former Dallas Fed President Richard Fisher is highly critical of this Fed’s policy.
He told CNBC that the Fed is “living in a constant fear of a market reaction. This is not the way you manage central bank policy.”
Fisher is spot on.
The Fed’s plan to hike rates four times in 2016 was cut to only two times. Even though U.S. economic data said the Fed should’ve been on track for four 0.25% rate rises this year.
Yellen blamed turbulent global markets. How convenient if the economy tanks… blame those darn foreigners for our woes.
But what Yellen really meant by that reference to “turbulence” was that the Wall Street crybabies had a tough first six weeks of 2016.
What Yellen should’ve said to the boys on Wall Street is this: The normalization of interest rates should’ve happened two years ago. We can delay it no longer.
Fed Outsources Monetary Policy
Instead, Yellen seems more intent on implementing her QP policy.
In effect, as stated in a Bloomberg article, the Federal Reserve has outsourced monetary policy to the financial markets.
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Noted economist Mohamed El-Erian said, “The risk is that markets’ perception of such accommodation will embolden them even more to try to force the policy hand of the Fed.”
Like a junkie, the Wall Street speculators will keep returning to Mama Yellen and the Fed for more and more “monetary crack.”
That isn’t good in a global economy.
As I stated in a previous article, the Fed has fired another shot in the currency war with its no-rate hike/dollar-weakening policy.
This will force the already-desperate Bank of Japan and European Central Bank into even more drastic measures. These worries are why the Japanese and European stock markets have stalled while Wall Street celebrates its pardon.
Who knows what dire effects those future policies may have on the global economy?
Inmates Running the Asylum
And all because Janet Yellen is afraid to stand up to Wall Street and deliver the harsh reality of raising interest rates.
At the very least, it will lead to incoherent policies. And perhaps a disaster.
The price signaling mechanism of the financial markets will go haywire. Why should a stock trade at $100 per share? With bolstering from the Fed, why not $500 or even $1,000 per share?
The fundamentals are becoming meaningless.
Even though earnings estimates in the first quarter of 2016 fell by the steepest level since the first quarter of 2009, the U.S. stock market kept soaring. Take a look at the graph below to see the shocking disparity in the market’s current policies.
Yellen’s Fed seems to have forgotten that price signaling is a key component of modern capitalism. We’re fast approaching the point of chaos. Buyers beware.