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The Fed is growing increasingly splintered as an
organization.
The media hasn’t really picked up on this
issue yet. But once they do things could become quite problematic for the Fed.
Remember, the primary force that has held the
financial system together since the Crash of 2008 was the view that the Fed
could backstop everything.
However, dissent is now growing at the Fed…
which means it will be harder for it to move forward in a unified fashion.
Consider its recent FOMC minutes released on January
3 2013.
With regard to
the possible costs and risks of purchases, a number of participants expressed the concern that additional
purchases could complicate the Committee's efforts to eventually withdraw
monetary policy accommodation, for example, by potentially causing inflation
expectations to rise or by impairing the future implementation of monetary
policy. Participants also
discussed the implications of continued asset purchases for the size of the
Federal Reserve's balance sheet. Depending on the path for the
balance sheet and interest rates, the Federal Reserve's net income and its
remittances to the Treasury could be significantly affected during the period
of policy normalization. Participants
noted that the Committee would need to continue to assess whether large
purchases were having adverse effects on market functioning and financial
stability. They expressed a range of views on the appropriate pace of
purchases, both now and as the outlook evolved. It was agreed that both
the efficacy and the costs would need to be carefully monitored and taken
into account in determining the size, pace, and composition of asset
purchases.
Source:
Fed FOMC minutes
Remember, the Fed only just announced QE 3 in
September 2012 and QE 4 in December 2012. At the time of these announcements,
the media heralded these moves as indicating that the Fed would act
aggressively forever.
And yet, today we find that the Fed was actually
conflicted about announcing QE 4 and was questioning the benefits of QE the very day that QE 4 was announced. As we noted
in last issue The Great Global Rig of
2012 is Ending, the schemes and policies implemented to hold the system
together (including QE) are beginning to lose their effect on the system.
On that note, let us turn our attention to the
Fed’s actual activity.
Since September 2011, the US Federal Reserve has
announced Operation Twist (extending this beyond its original deadline) as
well as QE 3 and QE 4. And yet, in spite of these numerous programs, until
January 10 2013 the Fed’s balance sheet was actually smaller than it
was the year before (the blue line below).
Throughout this period, the S&P 500 (the red
line below) began to disconnect from the Fed’s actual activity. Note
how the market continued to rally even when the Fed’s balance sheet was
contracting throughout most of 2012.
 
Why is this?
Because, starting in late 2011 and continuing to the
present, the Fed has discovered that verbal
intervention has the same impact as actual monetary intervention. Why
actually spend the money when you can simply state on TV that you will act if
needed and the markets react the same way as if you had announced a new program?
Between the end of QE 2 in June 2011 and the start
of QE 3 in September 2012, the Fed resorted time and again to implying it
stood ready to act at any time. Despite over eight FOMC meetings in which the
Fed didn’t announce QE the
markets continued to general push higher on hype and hope of more QE.
Between this, the Fed’s most recent FOMC
minutes in which multiple Fed members expressed concern about the efficacy of
QE, and the fact that the Fed balance sheet only just eclipsed its previous year levels on January 10 2013
(despite QE 3 and 4 being announced in the second half of 2012), we can draw
some very strong conclusions:
1) The Fed is growing splintered on how to proceed from
a policy standpoint.
2) This splintering will have political implications
(Bernanke will likely step down at the end of his term in early 2014, if not
before)
3) This splintering will have major financial implications for every asset class particularly stocks which have become
completely disconnected from economic realities.
We offer several FREE Special Reports to help
investors navigate this risk and others in the financial system. They include:
Preparing Your Portfolio For Obama’s Economic
Nightmare
How to Protect Yourself From Inflation
And last but not least…
Bullion 101: Everything You Need to Know About
Investing in Gold and Silver Bullion…
You can pick up free copies of all of the above at:
http://gainspainscapital.com/
Best
Graham Summers
Phoenix Capital Research
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