Fed Puts Ceiling on Long-Term Rates

By: Michael Pento | Mon, Sep 23, 2013
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The President of the Europe's central bank said back in July of 2012 that it would fight rising borrowing costs by doing "whatever it takes" to ensure sovereign bond yields do not spiral out of control. This past week Mr. Bernanke took a page from Mario Draghi's playbook and tacitly indicated that the Fed will now also promise to keep long-term interest rates from rising by any means necessary.

Starting from its inception, the Fed influenced the economy by adjusting the interbank overnight lending rate and providing temporary liquidity for financial institutions. However, in the modern era of central banking (post 1971) the Fed has resorted to unprecedented and dangerous manipulations, which are increasing by the day.

The Fed began in November of 2008 to purchase longer-dated assets from banks. Bernanke's plan was to greatly expand the amount of banking reserves, put downward pressure on long-term interest rates and to boost the value of stocks and real estate assets. He has since succeeded mightily in accomplishing all three. But since viable and sustainable economic growth cannot be engendered from artificially manipulating interest rates and boosting money supply, GDP growth and job creation have been anemic at best.

Therefore, the Fed has resorted to trying yet another unprecedented "solution" to fix the economy. Mr. Bernanke stated in his press conference following this week's FOMC meeting that the level of asset purchases would remain at $85 billion per month because," the rapid tightening in financial conditions in recent months could have the effect of slowing growth..." The only possible meaning Bernanke could have in mind when saying "the rapid tightening in financial conditions" is the increase of interest rates. The shocking part is that the rise from 1.5% to 2.9% on the Ten-Year Note does not even bring borrowing costs to half of the average level going back to the time when Nixon completely unpegged the dollar to gold.

What the Fed has done is historic in nature and yet it has received nearly zero attention in the main stream media. Bernanke has essentially admitted that just the threat of reducing QE--let alone actually bringing it down--was enough to send interest rates rising to the point in which economic growth is severely hampered. In other words, the Fed was forced to acknowledge that tapering is tightening and is now obligated to expand the balance sheet without end or be willing to allow a deflationary depression to reconcile the imbalances of its own creation.

This is because the price of risk assets and level of aggregate debt are so far above historic measures that even the slightest increase in borrowing costs renders the economy insolvent.

Investors would be wise to ignore the Fed's rhetoric about ending QE and concentrate only on what it actually does. Hard assets offer the best protection against a central bank that is incapable of extricating itself from monetary manipulations.

 


Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book "The Coming Bond Market Collapse."

 


 

Michael Pento

Author: Michael Pento

Michael Pento, President
Pento Portfolio Strategies

Michael Pento

Michael Pento produces the weekly podcast "The Mid-week Reality Check", is the President and Founder of Pento Portfolio Strategies and Author of the book ""The Coming Bond Market Collapse."

PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career he spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.

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