‘Fed Is in Denial’: How a $4 Trillion Dilemma Could Get Ugly

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Bloomberg: Fixed-income traders are telling the Federal Reserve that it might end up making a big policy mistake.

And it’s not just rising interest rates they’re talking about.

A more pressing concern has to do with the Fed’s crisis-era bond investments. Since October of last year, the central bank has been steadily reducing its holdings of Treasuries and mortgage-backed bonds. But as the unwind has picked up, unexpected knock-on effects are emerging in overnight lending markets, where demand for short-term cash has been on the rise.

Opinion: What, the Federal Reserve makes mistakes? Why that is impossible! Ivy league educations with lots of letters after their names make them great bank managers right?

Let’s take a look:

  • Ben Bernanke PHD – Economics professor
  • Janet Yellen PHD  20 years experience teaching economics, mostly at UC Berkeley
  • Jay Powell PHD (current Fed Chairman) former investment banker and under secretary of Treasury for George W. Bush

It was Ben Bernanke who along then Treasury Sec. Timothy Geithner who in 2008 dreamed up bailing out banks with a new term called quantitative easing (QE).

Formula for QE:

Central banks create money out of thin air – give it to banks – banks buy stocks and bonds – the bull market is on – the banks and super rich get much richer – Barack Obama can say he saved the global economy.

Bull Markets Don’t Die of Old Age, But Rather They’re Killed by The Federal Reserve

So now the Fed wants to unwind the $4 trillion which means selling massive amounts of bonds (the opposite of QE) driving interest rates higher.

The problem is when the Fed drives interest rates too high, the economy stops growing and the ensuing recession will force the Fed to drop rates again.

Round and round she goes, but we know where she stops:

When He opened the third seal, I heard the third living creature say, “Come and see.” So I looked, and behold, a black horse, and he who sat on it had a pair of scales in his hand.  And I heard a voice in the midst of the four living creatures saying, “A quart of wheat for a denarius, and three quarts of barley for a denarius; and do not harm the oil and the wine.” Revelation 6:5-6

Hyper inflation – a man will work a full day to earn enough to buy food for 1 day. The oil and wine (super rich) will have enough assets for a time.

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