We know the drill. The Federal Reserve Open Market Committee (FOMC) will meet on June 19 and June 20, 2012. On June 30, the Fed is scheduled to retire "Operation Twist" (selling shorter-term U.S. government bonds and buying longer-term U.S. Treasuries). The talk is whether the Fed will extend Twist, replace it with Operation Boom, or do nothing.
The "pro" positions will make the most noise since rooting for bubbles is Wall Street's job. The media observes its customary reverence for ensconced strategists and economists, who will parody the interests of Bubble TV's advertisers. The "cons" include: (1) a reluctant FOMC (word has it that Bernanke wants full-throated, or voted, support from the FOMC), (2) a meandering economy (not popularly thought to be in a recession), and (3) "He's run out of bullets."
Before addressing numbers (1), (2), and (3), the Fed chairman's footnote (or, so it was regarded) to his testimony before the Joint Economic Committee on June 7, 2012, should be considered his preferred excuse for Operation Boom: "The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely...". The Old World is approaching negative equity; recognition of such delays a multi-trillion dollar (and euro) response. Brussels and Strasburg are distant cities, but the New World is getting dragged, once again, over there. Most important is to understand the collateral, there and here. At the tipping point, Europe may close stock and bond markets.
Assuming Andalusia and Athens retain more decorum than Damascus, the FOMC will operate within more limited considerations.
If number (1) is true, the FOMC will probably have to wait before revving up the helicopter again. Number (2) should be modified. Federal Reserve Chairman Ben Bernanke does not care about the economy. He reacts to falling stock and bond prices. (Recall that when interest rates rise, bond prices fall.) Yet, the Fed chairman is compelled to link his Monopoly® money games to the common folk. If markets are breaking down, there are plenty of economic indicators to justify Operation Boom. The media will simply relay what it is told by the Fed's P.R. specialists. His indifference to the economy is the flip side of his inflating of markets, until the markets decide: "enough." See "Uncle Ben Wants You! - To Buy Stocks", "Economics 101: Long Material, Short Certified Idiots,", "An Absolute Zero."
There is overwhelming evidence the Fed's three monetary easing operations have indeed inflated asset markets. Simple Ben brags about his contribution to the tax base of Greenwich. The Federal Reserve chairman confirmed his affaire de coeur with hedge-fund managers when he vamped CNN on January 13, 2011: "'I do think that our policies [He was referring to QE2 - FJS] have contributed to a stronger stock market, just as they did in March of 2009,' [Bernanke] said, referring to the Fed's initial round of quantitative easing." His reference to "March of 2009" was a claim that QE1 had succeeded.
Returning to CNN's commentary of Bernanke's January 13, 2011, interview: "He pointed out that since he signaled the Fed would likely unveil QE2 during a speech in Jackson Hole, Wyoming [August 27, 2010 - FJS], that the Russell 2000 of small cap stocks is up 30%, even more than the 15% to 20% rise in blue chip indexes. 'A stronger economy helps smaller businesses,' he said." His weird reverence for the Russell 2000 Small-Cap Index and negligent association to small businesses was a distraction. Admittedly, it was a successful distraction. That is expected. Little is said of how Bernankeism has produced piecemeal employment, shredded savings, and confiscated pension plans by stealing our interest rates.
Another distraction that identifies Bernanke with common folk is houses. When the chairman next indulges his fantasy, he will claim Operation Boom will lift house prices. If the Fed's interference in other markets was intended to lift house prices, it has failed. According to Federal Reserve legend, lower long-term rates boost house prices.
Operation Twist succeeded in pushing down long-term rates. Freddie Mac 30-year fixed mortgage rates have fallen from 4.22% to 3.75% since the beginning of September 2011, when Twist began. The benchmark one-year ARM rate has likewise dropped, from 2.89% to 2.75%. Alas, the Case-Shiller Home Price Index for 20 metropolitan areas fell 6.2% from the end of August 2011 through March 2012 (the latest month published). The Index has dropped by 35% since its peak in 2006.
The answer to why lower rates have failed to lift prices is obvious: the bursting of the housing (really, mortgage) boom has burdened the mortgagee with unserviceable debt. Debt does not interest Bernanke or his generation of economists, so the Fed will persist in claiming long-term rates boost house prices. Thus, Simple Ben is not constrained by (2).
In fact, he is doing is job. Bernanke (and most of his associates) made it to the top by convincing his academic colleagues and department heads that he was reliable. He will never let the establishment down. He has not veered from his position that additional doses of money can prevent any depression. Never mind that, by any measure other than government transfer payments, the real economy is in worse condition than when Bernanke first opened the money spigot. It is in Depression.
That addresses (3). The FOMC will keep smothering us under its crank theories. Whether or not June 20 is the time: one warning. If markets do not respond, or the response is tepid, clear out. Since all prices are rigged, diminished prestige of Fed interference will clock markets.
Frederick Sheehan writes a blog at www.aucontrarian.com
