“When the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.”
— Peter Cook
One of my least favorite things to write about is the Federal Reserve. They’re opaque. Obnoxious. And boring.
And yet, they set the price of money. Here’s a chart of their collective wisdom when setting rates going back to 1955.
Have we really been in a state of emergency since 2008?
One good thing about following charts like this… we locked in a mortgage on one of our properties 12 points above the lowest rate ever in history.
Now we’re about to move into a period of rising rates. The modern theory is when inflation heats up, the Fed governors will have the collective wisdom to cool it down in time. Thereby protecting the dollar.
This week the governors have been filling the airwaves, making sure everyone knows that they’re ready to take action. A rate hike is expected in March, with more to follow. The Fed will also wind down its direct purchasing of assets, believing the pandemic-stricken economy is now strong enough to stand on its own.
“The risk that our policies are going to lead to a contraction in the economy, I think they’re relatively far off,” President Raphael Bostic of the Federal Reserve Bank of Atlanta told Yahoo News on Monday.
We’re not sure how Mr. Bostic justifies his prediction — assuming it’s based on anything at all. As we’ve said before, the Federal Reserve’s job is to convince investors that everything is fine.
But that wasn’t always the case, as Jim Rickards tells me in this week’s Session.
“I was around in the ’70s and ’80s,” Jim says, “when they never told you what they were doing.” The only people with any sort of advance notice of the Fed’s moves were the primary dealers.
These are a select group of institutions that “trade directly with the Fed,” Jim explains. So if you worked for a primary dealer, “you go to talk to the Fed.” It meant you knew its intentions “before anybody else in the market.”
Not anymore, though. Jim reports that “today it’s the opposite. They never want to surprise anybody.”
It’s obsequious for a reason: any unexpected moves “could sink the stock market or cause an asset bubble.”
Of course, understanding their plans means translating their jargon into English. Luckily, “there are very few technical terms, or jargon, or integral calculus equations that you cannot put into plain English,” Jim tells us.
Just look at the last time the Fed went on a rate hike spree, in 2015. As Jim explains, the lead-up to that began in 2013. “The Federal Open Market Committee was coming out with statements,” he says. “And they had a code word.”
The code word was “patient.”
“We will be patient in deciding when to raise interest rates,” Jim says. “So they were definitely telling you they were going to do it.”
The Fed isn’t even bothering to be circumspect this time. “The markets are betting three, for sure, later this year, maybe four,” Jim tells me — backed by comments from Fed representatives themselves. “When they tell you they’re going to do something, believe them.”
The question is, will the moves be as benign as Mr. Bostic thinks?
Probably not. The Fed is “always wrong,” Jim says. “If you want a good forecasting tool, figure out what the Fed’s going to do and assume the opposite.”
So if the Fed thinks it can shut off the spigots without derailing the economy… you should probably buckle up.
Follow your bliss,
Founder, The Financial Reserve