The Real Problem(s) With the Fed

|March 1, 2019

There’s a problem with the Federal Reserve.

Actually, there are tons of problems with the Fed.

Besides the fact that they shouldn’t exist at all, they are always behind the curve on everything.

Take interest rates, for example.

One of the biggest things the Fed does (the biggest is bailing out their too-big-to-fail bank constituents when they implode into insolvency from their greed) is manipulate interest rates.

The Fed’s original fake mandate was to manipulate rates to effect stable prices – in other words, to curb inflation when it reared its ugly head and guard against deflation when it cast a shadow on the economy.

Not that it matters, because it is what it is, but the Fed’s timing in manipulating rates is mostly what causes inflation or deflation.

Today, we’re going to talk about the wool that’s been pulled over everyone’s eyes, and what the Fed should be doing.

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Now, let’s get into the nitty-gritty.

Why the Fed Exists

Lo and behold, in 1977, Congress amended the Federal Reserve Act of 1913 thusly authorizing the Fed to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Job creation in addition to price stability is known affectionately as the Fed’s “dual mandate.”

Which, if you think about it, is a huge swath of a nation’s economy and destiny to cede to a private institution (yeah, the Federal Reserve System is private), itself a bastard child of America’s and Europe’s leading bankers of their day and their big bank progeny today, is insane.

Morally and ethically corrupt Congresses, having punted their most challenging and important functions and responsibilities to a made-for-government-financing loan shark, have no other choice but to cede the Fed the ability to manipulate interest rates to promulgate their mandates.

That’s the wool that’s been pulled over everyone’s eyes.

In a nutshell, the Fed prints money to pay for Treasury-issued debt, so politicians don’t have to raise taxes to pay for the programs they legislate into existence, which they use to buy votes.

That’s why deficits really don’t matter (for now). The Fed covers them.

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The Fed arranges to give its printed money to its big bank constituents who buy the government debt. Treasury bills notes and bonds on banks’ balance sheets are “assets” (deposits are “liabilities”), and banks count those Treasuries as reserves against which they make loans.

In other words, banks are making loans (creating money and credit) out of thin air.

That’s how “fractional reserve banking” works. That’s why the Federal Reserve System exists.

The problem, at least the one we need to get back to talking about, is the fake-Federal institution lowers rates too often for too long and raises rates too late and not usually for long enough.

Which, besides convulsing the economy over time, impacts the stock market.

That’s why the Fed blessed themselves with yet a third mandate at the end of last year – to make sure the stock market doesn’t tank on their policy proscriptions, like raising rates to much or too soon, or allowing their bloated balance sheet to runoff on “autopilot.”

The Fed’s self-declared third mandate, which has really been in effect since at least 1987, is to do no harm to the stock market.

And just like chasing its other mandates by manipulating interest rates, the Fed must massage interest rates to soothe stock market strains, tears, and breaks.

But like I said, the Fed’s behind the curve on everything, including not seeing bubbles or crashes coming – even when their manipulation of rates causes bubbles and crashes.

What the Fed Should Do

Now, where we’re at is pretty good.

The economy is humming along. There’s no inflation. Unemployment is super low. The outlook for job creation, including manufacturing jobs, is brighter than it’s been in 30 years. Interest rates are near historic lows. There’s plenty of credit sloshing around in the economy. Banks are in decent to really good shape. And the stock market is nearing new highs, again.

So, why did the Fed panic when the market fell close to 20%, which is the threshold for a bear market?

Why did they quickly wave their third mandate flag and surrender their plan to raise rates and their plan to let their balance sheet runoff when the market fell, when everything else was better than pretty good?

Because they could. Because they wanted to announce they were giving themselves a third mandate to manipulate the stock market higher, because they wanted to make it official that’s what they were capable of doing. And they wanted the public and Congress to bow to them for saving us from a bear market.

It was a knee-jerk reaction to what was nothing more than a wicked stock market correction, which is just something that the stock market is capable of doing at any given time.

But there was no reason to believe we were headed into a long-term bear market where stocks would continue to lose value when the economy is better than humming along.

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That’s the problem with the Fed’s blank check to be able to manipulate interest rates based on politics, on their almost always incorrect reading of the economy and the stock market, and their free hand to manipulate formerly free markets.

This week Fed Chairman Jerome Powell in prepared remarks to the Senate Committee on Banking, Housing, and Urban Affairs said, “While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals.”

The proof of their third mandate came out clearly when he said, “Financial markets became more volatile toward year-end, and financial conditions are now less supportive of growth than they were earlier last year…”

Powell even addressed the balance sheet in terms of financial conditions, saying, “I would note that we are prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.”

America needs to wake up to the manipulation of the economy and our once free markets by the Fake-Federal Reserve System (Bank).

Where the economy is at is pretty good. Where the stock market is at is pretty good.

Where interest rates are at is pretty low, pretty egregiously manipulated too low for too long.

The Fed should set a firm path to normalize rates by not manipulating them.

Not surprisingly, the only way to get the Fed out of the manipulation game is to legislate into the nearest dumpster.



Shah Gilani
Shah Gilani

Shah Gilani is the Chief Investment Strategist of Manward Press. Shah is a sought-after market commentator… a former hedge fund manager… and a veteran of the Chicago Board of Options Exchange. He ran the futures and options division at the largest retail bank in Britain… and called the implosion of U.S. financial markets (AND the mega bull run that followed). Now at the helm of Manward, Shah is focused tightly on one goal: To do his part to make subscribers wealthier, happier and more free.