Federal Reserve | timiacono.com - Part 55

Reading the Fed’s Smoke Signals

Greg Ip of The Economist (formerly the Fed’s “mouthpiece” at the Wall Street Journal) explains what Fed Chief Ben Bernanke meant yesterday when he said the U.S. economy needs “highly accommodative monetary policy … for the foreseeable future.”

Ip says, basically, that markets got it wrong again in that Bernanke was saying the same thing as he did back in May when the “tapering” talk started – that markets continue to confuse interest rate policy with quantitative easing.

Bravo for the Fed

Via this item at the Pragmatic Capitalist blog come these thoughts from David Rosenberg of Gluskin Sheff who states the obvious when commenting on how the benefits of Federal Reserve policy in recent years have been felt most on Wall Street rather than Main Street.

What the Fed managed to do this cycle was help the rich get richer with no major positive multiplier impact on the real economy.  Sorry, but Peoria Illinois, probably does not know how to locate the corner of Broad and Wall.  So the Fed, by virtue of its excursions into the private marketplace for capital, manages to engineer the mother of all Potemkin rallies, sending the S&P 500 up 140% from the 2007 trough to attain record highs by May of this year (even with the June swoon, the SP 500 still managed to eke out a 2.4% advance in the second quarter and is up 12.6% for the year in the best first-half performance since 1998 when GDP growth was 5.5% … for this the Fed should just continue with the status quo?).  It took but six years to make a new high in the stock market.  In the Great Depression, it took 25 years.  Bravo!”

On the housing market, Rosenberg doesn’t seem to think that rising mortgage rates will have much of an impact since the recent boom has been driven by “all-cash institutional investor deals aimed at buying-for-rent” (his words) who all want to be like Mr. Potter on It’s a Wonderful Life (my words). This isn’t good news for Main Street either.

Danger Time for the Next Fed Chief

With the near-certain departure of Fed Chief Ben Bernanke in just over six months, like you, perhaps, I can’t help but recall some of the commentary the last time someone new was about to sit in the big chair at the central bank and the first image that comes to mind is this cover at The Economist from almost eight years ago.

Of course, there were no immediate problems back in early-2006 when Fed Chief Alan Greenspan departed with his reputation still intact (a condition that changed rather abruptly a couple years later). This is in contrast to when ‘Ol Greenie took over in 1987 and was greeted with a stock market crash.

This time around, the world has fresh memories of the deleterious effects of bursting asset bubbles, yet, that seems to be where we’re headed again after unprecedented efforts by central banks to re-inflate said asset bubbles.

Those Amazing Bond Fund Outflows

From this CNBC story about the exodus out of bond funds comes the chart below that should give any central bank economist pause. The report says there have been record monthly outflows in June, yet it’s not clear if they’ve extrapolated to get the full month flows or if the new record has already been set just three weeks into the month.

The latest data from the Investment Company Institute is mostly in line with that shown above. For the two weeks ending on June 12th, nearly $19 billion has been pulled out of bond funds (not including ETFs, presumably) and this works out to a full month withdrawal of nearly $40 billion, about the same as in October 2008.

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