The FED's New Normal: $900 Billion a Year . . . Indefinitely
The Federal Reserve will continue to expand the monetary base by $900 billion a year. This is down from $1 trillion a year, or a reduction of 12%. The announcement triggered an increase in the Dow Jones Industrial Average of 293 points.
The FOMC released a statement, as it always does. This statement removed all threat of any reduction in the policy of monetary inflation. The FED will maintain its "highly accommodative" policy for years. It's now official.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.
Excuse me? How can a highly accommodative policy continue for a considerable time "after the asset purchase program ends"? Isn't monetary policy based on asset purchases? No one asked this at the press conference. Someone should have.
This was Fedspeak for "bond market subsidy." If the statement means anything, it means that the FOMC will start buying short-term T-bills instead of subsidizing Fannie/Freddie mortgages and T-bonds. If it does not mean this, then it is meaningless. But the financial media are content with meaninglessness, as long as continuing FED expansion is now guaranteed.
The phrase "considerable time" means indefinitely. The Committee still will use 6.5% unemployment and 2% CPI inflation as its standards. It will also use unnamed other criteria, which will never be identified in public.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.
Translation: "We will continue to make this up as we go along."
How long will this last?
The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal.
Translation: "$900 billion a year is the new normal."
The Federal Reserve had previously established targets for justifying a reduction: unemployment at 6.5% and an increase in the Consumer Price Index of about 2%. The unemployment rate is 7%. The CPI is flat. So, the only two explicit targets meant exactly nothing. The Federal Open Market Committee reduced the rate of monetary expansion by a token amount. But it made it clear that this token reduction is all the markets need fear.
We can see what the Federal Reserve has done to the monetary base. It has done it in spurts.
This announcement sent a signal: "no more spurts." No more stop and go.
Consumer prices were flat in November. They were down by .1% in October. Year to year, November 2012 to November 2013, they were up by 1.2%. So, they are slowing. Yet the Federal Reserve, which insists that the economy needs close to 2% per annum increase, is now content with flat prices -- concerned, as Bernanke said, but content. He reaffirmed this in his press conference. The goal is still 2% per annum. This was his way of saying: "This token reduction is all that investors need fear. We will not pull the plug." That was his parting shot as chairman.
To sustain the economy, FED economists clearly believe, there must be no further cuts in the rate of monetary expansion. To prevent a return to 2008, the FOMC must continue to inflate at a rate considered inconceivable in 2007 and before.
This is the Federal Reserve System at 100 years. The economy is now addicted to an emergency monetary policy.
The FOMC has made it clear: the bubble conditions of the financial markets will not deliberately be popped by a return to 2007. This is the new normal -- endless addiction to monetary expansion.
Meanwhile, the banks refuse to lend into the economy. They pile up excess reserves. The FOMC clearly does not expect this to cease. That is why $900 billion a year is the new normal.
