Federal Reserve | timiacono.com - Part 55

Roach: “Zero Bound Until 2025″

Not surprisingly, Morgan Stanley’s Stephen Roach doesn’t think much of the idea of perpetual ZIRP (Zero Interest Rate Policy) as part of an ongoing policy by the Fed and he talks to Bloomberg’s Tom Keene on this subject and others while in Davos, Switzerland.

Roach says that, along with many other Western central bankers, Fed Chief Ben Bernanke is “betting the ranch on open-ended QE and zero interest rates” that, throughout history, have only been used as emergency measures, not long-term policy.

Bernanke’s Disingenuous Message to Savers

Skip to about the 28 minute mark in the video below of Federal Reserve Chief Ben Bernanke’s press conference yesterday and you’ll hear the confusing, not-very-helpful message the central bank has for savers in our super-low interest rate environment.

Basically, his answer to Gregg Robb of Marketwatch about the difficulties being experienced by fixed-income investors makes no sense as he confuses conservative investments with riskier ones in the rather disingenuous answer excerpted below:

In the case of savers, we think about all these issues and we certainly recognize that the low interest rates we’re using to try to stimulate investment and expansion of the economy also pose a cost on savers who have a lower return. And we do hear about that obviously and we do think about that.

I guess the response I would make is that the savers in our economy are dependent on a healthy economy in order to get adequate returns, in particular, people who own stocks, corporate bonds, as well as Treasury securities. And if our economy is in really bad shape, then they’re not going to get good returns on those investments.

So, I think what we need to do is, when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and increase growth and that, in turn, will lead ultimately to higher returns across all assets for savers and investors.

That’s little comfort for all the risk-averse savers out there just looking to get more than one percent on a certificate of deposit when the inflation rate is running at three or four times that amount (by government measure, your results may be much higher).

Fed to Keep Rates Freakishly Low Thru 2014

It looks like I underestimated the Federal Reserve’s largess in the New Year when I extended their freakishly low interest rate guarantee by only a year in the chart from this earlier post.

Turns out, in their policy statement today, the central bank added a full year-and-a-half to their low-rate pledge, more bad news for conservative savers who were hoping for a little better return on their money after three years of punishment, but great news for owners of precious metals that soared today on the news.

It’s not hard to understand why gold and silver prices shot upwards.

Low or negative real (inflation adjusted) interest rates are about the single best predictor of rising metal prices and it’s pretty hard to get a positive inflation adjusted interest rate when you start out with an interest rate of zero.

Pimco’s Bill Gross seems to think that this amounts to “financial repression”, a term that we’ll be hearing lots more between now and 2014. Today’s action was seen as, effectively, QE2.5, with the groundwork now laid for QE3, QE4, etc.

It looks like Richmond Fed President Jeffrey Lacker will be 2012’s lone dissenter as he voted against today’s action, preferring not to state a timeframe for how long rates are expected to be kept freakishly low.

The Fed also lowered their expectations for real U.S. economic growth, from a range of 2.5 to 2.9 percent to just 2.2 to 2.7 percent, and said they expect the jobless rate to end the year at between 8.2 to 8.5 percent, a slight improvement from their prior forecast.

Oh yeah. The central bank now has an inflation target too – 2 percent. Just don’t pay any attention to food prices that are rising by multiples of that amount because the Fed knows what it’s doing here. It’s all good (i.e., if you own precious metals).

What Happened at the FOMC Meeting?

I’m not around at the moment to comment on the results of today’s FOMC (Federal Open Market Committee) meeting that concluded a few minutes ago, likely to have resulted in some sort of announcement about the central bank’s communication policy and an enhanced economic/policy forecast, but, when I’m able to catch up on this and Fed Chief Ben Bernanke’s press conference, I’ll try to put something up later in the day.

Based on what I’ve been reading about an extension of the Fed’s freakishly low interest rate guarantee, we’re probably looking at the situation to right.

This is not going to make savers happy, but, if you like to borrow money, you’re likely to get lower rates for a while longer.

Come to think of it, those low-rate credit card offers could be arriving in our mailboxes for the rest of the decade.

Anyway, I’m hoping that someone asks Bernanke about the 2006 FOMC meeting transcripts and how the nation’s brightest economists could have been guffawing all year long when they maybe should have been looking at the rapidly inflating housing bubble that would burst a year or two later.

See The Fed’s Housing Bubble Laughter from the other day for the particulars about this.

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