Who would have possibly thought that after the Fed created the biggest asset bubble in history when it first, and then other central banks, purchased almost $10 trillion in assets after the financial crisis, ballooning the Fed’s balance sheet from under $1 trillion to over $4 trillion, that the market could possibly be concerned about the ongoing unwind of the Fed’s balance sheet?
Not Chicago Fed president Charles Evans, that’s for sure.
Speaking to reported after a speech in Milwaukee, Evans was discussing concerns in financial markets about the Fed’s balance sheet wind down, and said what could be the most patently stupid line in Federal Reserve history: “This is interesting and perhaps I’ve been a little bit slower to appreciate the concerns that some expressed from the financial sector.“
Yes, one of most powerful people in the room just said he was “a little bit slower” to appreciate the market’s concern that after the Fed quintupled its balance sheet, the reverse process could be a problem.
But wait, it gets better, because his very next line was… well – here it is: “Apparently what financial institutions and commentators are pointing out is that there’s a different dimensionality to liquidity provision and how they go about doing a bunch of things that maybe the balance-sheet runoff is interfering with. I don’t know.“
Yup, he doesn’t know… but “I think it’s noteworthy. I think it’s something that we need to pay attention to. Exactly what level concerns about how the economy is performing would have to rise to in order to make an adjustment, I can’t say I know, but I’m certainly more open-minded.“
Behind this barrage of hollow rhetoric was his admission that he is “certainly open-minded” about what level the S&P would have to fall to in order to “make an adjustment” in the Fed’s balance sheet reduction.
But wait, there’s even more, because apparently while everyone at the Marriner Eccles building was focusing on interest rates, they forgot about the elephant in the room: the unwind of trillions and trillions in bond purchases, to wit:
“I still think that changes in our policy interest rate instrument are going to be adequate for a while, but it’s something to think about.”
Yet just moments after admitting he doesn’t really know what is the appropriate level for the Fed’s balance sheet, he said he is confident that “we’re still a bit of a way from actually having to make final decisions on that.”
Just like the Fed has no idea what the actual neutral rate is, but is confident that the Fed Funds rate is below it… or on top of it, or above it, or something…
Finally, conceding that the balance sheet unwind may end far sooner than most expected (i.e., the start of 2020), Evans said that “an operating environment that has somewhat abundant reserves a little closer to a floor system would serve us well. I think it has a number of advantages, but we’re still having discussions about how that should play out.”
And with all that, we’d hate to hear Evans’s answer if asked about the fact that all central banks are now actively draining liquidity from the global financial system.
Sarcasm aside, the reason why the above is stunning is that these are the views of the people who determine the day to day fate of the stock market, the US economy, and by implication, the world. Who could possibly want to buy gold in this environment…
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