Andy’s Notes: I smell the creation of some more Maiden Lane, LLCs in the not-so-USFed’s future. Evidently nobody else wants this garbage. Beware of governments forcing pension plans to purchase the garbage in concert with the central bank’s volunteer purchases. The end game of all this is that eventually the central banks own everything. All the debt will be owed them, along with all that interest and therefore, economic output. I think the last thing these sociopaths need to worry about is overheating the USEconomy. 1.2% annualized growth from cooked numbers is hardly worthy of even mentioning the overheating. This is another great example of them playing both sides against the middle. The goal is to do little or nothing from an interest rate / monetary policy perspective other than maybe a token 25 bps rate hike this year. The acquisition of corporate debt comment is worthy of mention though. It falls into the same category as buying mortgages and you all need to face the reality that by the time this game is over, these jerks will literally own almost ALL financial instruments.
JACKSON HOLE, Wyo. (Reuters) – Federal Reserve policymakers are signaling they could raise U.S. interest rates soon but they are already weighing new tools they may need to fight the next recession.
A solid U.S. labor market “has strengthened” the case for the first rate increase since last December, Fed Chair Janet Yellen told a central banking conference in Jackson Hole, Wyoming. Several of her colleagues said the increase could come as soon as next month if the economy does well.
Further rate hikes are expected to be few and far between as the U.S. central bank tries to balance a desire to fuel growth against worries it could overheat the economy.
But Fed officials at three-day conference that ended Saturday also said they need to consider new policy tools for use down the road, such as raising the inflation target or even Fed purchases of non-government-backed assets like corporate debt.
Such ideas would test the limits of political feasibility and some would need congressional approval. The view within the Fed is that it could take effort to win over a public already skeptical of the unconventional policies the Fed undertook during the last crisis. – Can you spell another financial catastrophe? The Hegelian Dialectic is in full view here!
Policymakers think new tools might be needed in an era of slower economic growth and a potentially giant and long-lasting trove of assets held by the Fed. And they are convinced the time to vet them is now, while rates look to be heading up.
“Central banking is in a brave new world,” Atlanta Fed President Dennis Lockhart said in an interview on the sidelines of the conference.
At the center of the Fed’s discussions is its $4.5 trillion balance sheet, built up by bond-buying sprees to combat the 2007-09 recession but which has been criticized by many lawmakers.
While policymakers have maintained the Fed should eventually reduce its bond holdings, Lockhart said some officials were closer to accepting that they needed to learn to live with them.
“I suspect there are colleagues who are contemplating at least maybe a statically large balance sheet is just going to be a fact of life and be central to the toolkit,” he said.
Officials have said they will slowly let the balance sheet shrink, a process that would take years and would not begin until interest rate increases are well underway. Substantial progress could be made only in a very long-lived economic expansion. (Letting the balance sheet shrink is deflationary – cash from the system would be used to buy these junk assets – NOT happening)
“I am sure everyone in the audience would be happy if this were the reality. I certainly would be,” Simon Potter, the New York Fed’s markets chief, said during the conference.
Yellen, in her speech on Friday, said balance sheets would likely swell again in future recessions as the Fed snaps up assets to stimulate the economy. JOKE.
The conference, attended by all but two of the Fed’s 17 policymakers as well as central bankers from around the world, also presented a menu of more exotic proposals. This included a Fed takeover of short-term debt markets and abolishing cash in order to charge negative interest rates.
Many of the more radical proposals, including one to abandon monetary policy altogether and focus on urging runaway deficit-spending, were seen as ivory tower musings.
Most policymakers, including Yellen, said it was likely the tools the Fed used to fight the last crisis, including rate cuts, bond purchases and jawboning on rate expectations, will be adequate.
Still, she said, “future policymakers might choose to consider some additional tools that have been employed by other central banks,” including buying a wider range of assets or raising the inflation target. She also cited the possibility of targeting the average level of prices in the economy rather than their rate of change. Another methodology change?
Notably, her laundry list of possible tools did not include negative rates, an idea that has been nearly universally panned by Fed officials. She said the Fed is not actively considering additional policy tools but participants at the conference suggested the process is already well underway.
“You are seeing an exploration of how are we going to operate in a quite different world than before the crisis,” Lockhart said. In other words, the rules have changed – meaning there are none. It is every man for himself.
