The FOMC released its latest statement on monetary policy. As expected, there were no major announcements.
The Fed will maintain the target of the federal funds rate between 1% and 1.25%. It will achieve this by continuing to pay 1.25% on bank reserves. It is nice work for the bankers that they can hold other people’s money and “earn” 1.25% interest from the Fed.
The Fed has finished up its first month of “balance sheet normalization”. It is the first month of many, unless it abandons its plan entirely. At its current pace and plan, the Fed won’t be back to its original levels of 2008 for about another decade. In other words, it will never happen.
The Fed is allowing $10 billion per month to expire of maturing government debt. That is only $120 billion per year. If it eventually ramps it up to $50 billion per month as planned, that is still only $600 billion per year. While that is a big sum in comparison to the $800 billion monetary base of 2008, consider that the Fed created well over $3 trillion from 2008 to 2014. And chances are, the Fed will never get to the point of rolling off $50 billion per month.
The next FOMC meeting is in mid-December, where it is expected that the target for the federal funds rate will move up by another one quarter percent.
Meanwhile, Donald Trump is getting ready to announce his appointment for the next Fed chair. According to sources, it is going to be Jerome Powell. By the time you read this, it will probably have been announced already.
The bottom line is that Powell is another establishment guy. He may be marginally different from Janet Yellen or other considerations for the position. But if the last year has told us anything, Trump is not draining the swamp. He is merging with the swamp. He has been taking some of the credit for the boom in stocks, which is stupid because then he is going to own the crash. At this point though, there was no way that Trump was going to appoint someone outside of the mainstream.
The Fed chair is sort of like the president. It is something of a figurehead position. The Fed chair is expected to fall in line with establishment opinion. Even Greenspan, who was supposed to be a disciple of Ayn Rand, mostly fell in line.
Looking back on Janet Yellen’s term, she has actually been one of the better Fed chairs, rhetoric aside. There is no doubt she is a Keynesian and a shill for the establishment, but her actual policies as Fed chair have been tight by comparison. Of course, this is similar to saying that government spending stayed relatively stagnant under Obama. He was starting out just as the budget had exploded.
It is the same with Yellen. The balance sheet had already exploded prior to her coming in. Therefore, it wasn’t as challenging for her to keep a relatively tight monetary policy. She oversaw the wind down of QE3, and it is has been a tight policy since October 2014. To be sure, Yellen would have been quick to ramp up monetary inflation again if the economy had hit another recession.
Good luck to the next Fed chair. The last major recession started almost a decade ago. Since then, we have had unprecedented monetary inflation and government debt. There are major asset bubbles, especially in stocks. Surprisingly, even housing seems to be getting into bubble territory again, at least in some regions.
We have no idea when the next economic downturn will happen, but it looks like it will be a doozy when it does. Stocks keep hitting new all-time highs. The Dow has gone from a low of below 6,500 in March 2009 to its current level above 23,000. What could possibly go wrong for the next Fed chair?