- When it comes to interest rates, you need to get “real”…
- It’s too late for monetary normalization…
- 🧨 “Old money” invests in “real” assets — assets like real estate.
Dear Reader,
The Federal Reserve reduced its target rate by 25 basis points yesterday.
Was it a dovish nick… a hawkish nick… a bullish nick… a bearish nick?
I do not believe it is any of them. Or perhaps it is all of them.
That is because I do not believe the federal funds rate has authentic heft in back of it.
It is as relevant to today’s markets as last year’s news is relevant to today’s markets.
Here — as I have cited before — I cite Freedom Financial News contributor Jim Rickards:
- At times, the Fed seems to be at the center of the financial universe. It’s not…The Fed does print money (called M0) by buying U.S. Treasury securities and mortgage-backed securities from a select list of banks called the primary dealers…
- But since 2008, those dollars are then put on deposit with the Fed by the banks in the form of excess reserves. Those dollars don’t go anywhere… The actual dollars are not lent, spent or invested. They’re sterilized on the Fed balance sheet.
- It’s all a mirage.
- The FOMC target rate for fed funds (called the policy rate) is… irrelevant…the fed funds market to which that rate applies has not functioned since the 2008 financial panic.
- In other words, the Fed is targeting a rate for a market that doesn’t exist.
Are Interest Rates Really That High?
The president — evidently — trusts the Federal Reserve’s false fireworks.
He moaned yesterday that the “stiff” and “dead head” Powell should have undertaken a deeper hacking, that the reduction was:
- A rather small number that could have been doubled, at least doubled.Our rates should be much lower.
Just so. Yet are interest rates unduly elevated?
Let us consider the “real” interest rate. The real interest rate is the nominal interest rate minus the inflation rate.
It is labeled the real interest rate for cause.
It penetrates numerical mists. It scatters statistical fogs.
It clarifies.
Mr. Rickards, by way of explanation:
- The real interest rate is the nominal interest rate minus the inflation rate…
- If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates…
Now you have the flavor of it. What then is today’s real rate?
The Real Rate
Let us establish the 10-year Treasury rate as our nominal rate.
That is because the 10-year Treasury rate wields far more economic poundage than the weak and wan federal funds rate.
The 10-year Treasury note currently yields 4.164%. Meantime, the latest consumer price inflation rate runs to 3.0%.
If we subtract the inflation rate (3.0%) from the nominal rate (4.164%)… we find the real rate runs to 1.164%.
Thus we discover that the real rate squats substantially beneath the federal funds rate of 3.50-3.75% — a nice point to put somewhere.
Yet the president fixates upon the federal funds rate.
Back to QE, Whatever They Want to Call It
Meantime, the Federal Reserve announced yesterday that it will commence purchasing $40 billion of Treasury bills per month, beginning Friday.
That is, the Federal Reserve is embarking upon another round of quantitative easing — though it dared not speak the phrase.
It instead resorted to its customary flubdubbery, announcing that:
- The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.
A rose by any other name is still a rose?
Well then, a wart by any other name is still a wart.
Yet the decision surprised me as last evening’s sunset surprised me… as this morning’s sunrise surprised me… as the unerring imbecility of a United States congressman surprises me.
“Mathematical Surrender”
Just last week I cited quantitative analyst Hamoon Soleimani, who labeled the Federal Reserve’s resumption of quantitative easing “mathematical surrender.”
Today I cite him again:
- This isn’t a policy choice — it’s mathematical surrender…
- The Fed cannot shrink its balance sheet to pre-crisis levels without triggering a liquidity crisis. The modern financial system operates under an “ample reserves framework” — a euphemism for permanent monetary expansion.
- Banks, pension funds, and Treasury markets have become structurally dependent on massive reserve creation… They’re stopping [QT], not because inflation is conquered, but because the financial system cannot handle genuine monetary normalization.
I believe the fellow is correct. It does represent a sort of mathematical surrender.
Yet what practical choice iss left to the Federal Reserve?
Is it supposed to normalize monetary policy at the price of a liquidity crisis?
The Federal Reserve fears a liquidity crisis as the devil fears holy water.
Time and time again it has opted against the hard choice of monetary normalization.
And each occasion it opted for monetary abnormalization, monetary normalization became increasingly perilous.
Finally it arrived at the point in which monetary normalization became inconceivable.
We are long past that point. There is no going back.
And that is the unvarnished — yet unacknowledged truth — behind yesterday’s announcement.
Regards,
Brian Maher
for Freedom Financial News
