Drowning in a Liquidity Trap of Our Own Making


Same old, same old. The Fed is stuck in a liquidity trap and we’re the ones slowly drowning. Excerpts from WSJ article:

Fed Opts to Stay Course, for Now

By Victoria McGrane and Jon Hilsenrath

The Federal Reserve held steady on its bond-buying program in a 9-1 decision made Wednesday.

Fed officials stuck to their assessment of the slow-growing economy following that political storm and decided to keep their $85 billion-a-month bond-buying program in place for now. The decision left investors uncertain about when officials will begin paring the purchases that have been an important driver of asset prices and interest rates.

Officials spoke earlier this year about starting to pull back the program before year-end if the economy improved as expected. But that comes with the strong caveat that the decision depends on whether the frequently disappointing economy lives up to the central bank’s expectations. [At this rate does anybody still believe the economy will ever live up to expectations? No, because our risk-return calculations on risk-taking actions has been so distorted by credit manipulation that uncertainty reigns.]

“The housing sector has slowed somewhat in recent months,” the Fed said in its statement. All in all, however, officials stuck to their view that the economy is expanding “at a moderate pace” and exhibits growing underlying strength.

The Federal Reserve held steady on its $85 billion-a-month bond-buying program and gave few new signals on when officials expect to pull back on the program.

Washington’s budget battles shut the government for 16 days, and lawmakers and the White House argued about raising the government’s self-imposed borrowing limit.

Many economists believe the shutdown shaved just a few tenths of a percentage point off economic growth for the quarter, but it also appears to have shaken household and business confidence. [Who’s kidding who here? The average citizen shook off the budget shenanigans as political theater with little effect on their economic decisions. The uncertainty over the economy remains, as it has for 5 years now. See next sentence.]

In a new Wall Street Journal/NBC News poll, just 24% of Americans said they think the economy will improve over the next year, slightly higher than in the middle of this month’s partial government shutdown but otherwise the lowest level of optimism since late 2011, after Congress and the White House last tussled over the debt ceiling.

Investors appeared disappointed the Fed didn’t show a stronger commitment to sticking with the program longer. The Dow Jones Industrial Average finished down 61.59 points, or 0.39%, to 15618.76. Yields on 10-year Treasury notes rose 0.019 percentage point to 2.526%. [Of course, QE has been a boon for financial asset investors and financial markets. Who wants to see the party end?]

The Fed retained language from its September statement that indicates officials are prepared to pull back from bond buying if the economy picks up. Officials said they see evidence of “underlying strength in the broader economy” but chose to “await more evidence that progress will be sustained” before adjusting the bond-buying program. [Yeah, when pigs fly.]

The Fed dropped an earlier reference to “tighter financial conditions” potentially hurting economic growth, suggesting officials were relieved that long-term interest rates, including those on Treasurys and mortgages, have come down since the September meeting. Still, those rates remain higher than they were in May before Fed officials started talking about reducing their bond buying. [So, what happens when interest rates start rising to reflect risk and the time value of money to lenders? The housing market will go south and the debt service on Treasuries will sky-rocket, causing the Fed to inject more liquidity into the system to save the economy from a long overdue correction. At this rate, that correction will never come and we are permanently stuck in a new normal called stagflation.]

Economic data between now and the Fed’s December meeting will influence the Fed’s decision. But the data could be unclear because the shutdown affected the federal agencies that collect the figures.

“[T]here is a big difference between keeping an open mind and actually tapering in December—to act the Fed will need the support of the data, and it is still unclear that upcoming releases will be strong enough to induce it to scale back” bond purchases at the December meeting, said analysts at Cornerstone Macro. They predicted the first cut in the first quarter of 2014, but warned that “the probability of a December taper seems higher than many investors appreciate.” [And when that happens market will sell off and the Fed will panic again. Does anybody in Washington see the insanity in this policy progression?]

The Fed also voted to keep short-term interest rates near zero, where they’ve been since late 2008. Officials didn’t make any changes to so-called forward guidance, which are the statements made about the likely path of interest-rate policy. [Yes, it’s ZIRP forever and the sick economy that goes with it.]