The Fed Has Set Us Up For The Crash Of 2013

by Phoenix Capital Research

Having pumped the system with liquidity non-stop since the Crash of 2008, the Fed now realizes it’s in big trouble and needs to manage down expectations of further stimulus.

As we noted earlier this year, the Fed, while attempting to appear committed to endless money printing via its QE 3 and QE 4 programs, was in fact decidedly split on whether to commit to more as well as the risks inherent to additional QE. Indeed, the Fed FOMC minutes indicate that some Fed members were concerned about whether QE even worked as a monetary policy.

Below are the notes from the Fed’s December 2012 FOMC minutes (the meeting during which the Fed announced QE 4). I’ve added highlights to emphasize the shift in tone.

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.

http://www.federalreserve.gov/monetarypolicy/fomcminutes20121212.htm

There are three key implications here:

1) The Fed acknowledged that QE causes inflation expectations to rise (red text)

2) The Fed was divided on the efficacy of QE (green text)

3) The Fed was not committed to employing QE forever despite its public declarations to that effect(blue text)

This shift in tone went largely unnoticed by the media. However, the implications are very serious. By way of explanation, let’s quickly review the Fed’s primary moves in the post-Crisis era.

In 2008 the Fed had its back against the wall in terms of saving the system. Since that time every new Fed intervention (verbal or monetary) has been aimed at propping up the Too Big To Fail Banks and pushing the stock market higher.

The first wave of this came via QE 1 and QE 2 in which the Fed collectively monetized nearly $2 trillion in assets. However, once QE 2 ended in 2011, we noted the Fed began to realize that it could get the “positive” effects of additional stimulus (higher assets prices) without actually having to engage in more stimulus, simply by issuing verbal interventions at critical moments.

Read more at http://investmentwatchblog.com