The Fed Vice-Chair has begun laying the groundwork for NIRP.
The US Federal Reserve is obsessed with market reactions to its policies. Because of this, anytime the Fed plans to announce a major change in policy, it preps the markets via numerous leaks and hints… oftentimes for months in advance.
An excellent example of this concerns the Fed’s decision to taper QE back in 2013.
At that time, the Fed had been engaging in two open ended-QE programs… programs that had been running for over six months.
Rather than simply beginning to taper the programs, then-Fed Chairman Ben Bernanke, hinted that the Fed was contemplating a taper in June.
The markets reacted sharply with bond yields rising.
The Fed then spent six months allowing the market to get used to the idea of a taper, before the actual taper finally began in December 2013.
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Put another way, the Fed gave the markets a full six months to adjust to a change in policy, before actually implementing said change. This only highlights just how focused the Fed is on market reactions to its policies.
In the simplest of terms: the Fed will NEVER surprise the market. This is particularly true now that the Fed is in the political cross hairs due to ample evidence showing its policies have increased wealth inequality.
If the Fed is planning on something new, particularly something that might have political repercussions, we’ll see numerous hints and suggestions well before the actual policy is unveiled.
With that in mind, we need to consider that the Fed is now actively engaged in a campaign to prep the markets for Negative Interest Rate Policy or NIRP.
- First we find that a Fed official hinted at NIRP during the Fed’s September 2015 meeting.
- Then, in early October 2015, NY Fed President Bill Dudley stating that negative rates were “an option” though not a “relevant conversation” right now.
- This statement was followed up by former Minneapolis Fed President Narayana Kocherlakota stating point blank that the Fed should “consider negative rates.”
Kocherlakota is a former Fed President and so is more aggressive with his campaign.
Fast forward to yesterday and…
- Now Fed Vice-Chair Stanley Fischer stated in a Bloomberg interview that NIRP is working “more than I expected.”
Carefully note the word choice here. Fischer didn’t say he was “surprised” to see NIRP working; his phrasing implies that he “expected” NIRP to work. The surprise element is just how well it’s working.
It is one thing for Fed uber-doves or former Fed President to promote an extremely aggressive scheme; it’s entirely something else for the Fed VICE-CHAIR to do so.
Fischer is the current Vice-Chair for the Fed (formerly this position was held by Janet Yellen). As such, he is the most likely candidate for future Fed Chair when Yellen’s term ends in February 2018.
Previously, the Fed had never once hinted at or discussed NIRP during its policy meetings. Then, in the span of three weeks, an anonymous Fed official state that he or she believes NIRP is coming to the US, followed by two highly visible Presidents suggesting NIRP for consideration, and now the current Fed Vice Chair (and most likely candidate for future Fed Chair) has stated that NIRP is “working more than I expected.”
NIRP WILL BE COMING TO THE US.
This is simply part of the Fed’s larger War on Cash.
For six years straight, the Fed has been trying to “trash” cash.
First it cut interest rates to zero… making it so that savings deposits produced almost nothing in the way of interest income. Consider that at current rates, a retiree with $1 million in savings earns a measly $2,500 per year in interest income.
The Fed’s hope was that by making it painful for savers to sit in cash, said savers would move into risk assets such as bonds and stocks. This has worked in that stocks are now in one of, if not THE biggest bubbles in history… while bonds are trading at yields never before seen outside of wartime.
However, the Fed overlooked two outlets for investors who didn’t want to be forced into risk. They are: Gold bullion and physical cash.
The Fed has been dealing with bullion via clear manipulation of prices for years (that’s an article for another time). And now it is moving to make physical cash obsolete.
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