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moneymetals

Fed Must Face Reality: No Return to Normalcy for Monetary Policy

More than a decade after the 2008 financial crisis, U.S. monetary policy continues to operate in crisis management mode.

Despite a long, drawn out rate-hiking campaign – now paused – the Federal Reserve has yet to bring its benchmark interest rate up to normal levels historically.

It has yet to unwind the vast majority of the nearly $4 trillion in emergency asset purchases added to its balance sheet.

The Fed outlined its “normalization” policies back in September 2014.

The two main components of normalization are gradual increases in the federal funds rate toward neutral and gradual reductions in securities held on the central bank’s balance sheet.

Even with the benefit of an unusually prolonged period of favorable economic conditions, progress toward normalization has been slow and fleeting.

Expect Continually Low Interest Rates, Ongoing Stimulus

Full normalization – a return to pre-2008 monetary conditions as is the Fed’s stated goal, may never come.

It may not be possible to withdraw much more stimulus from mortgage and equity markets without collapsing them. It may not be possible to unload U.S. Treasury securities without causing a funding crisis for the government.

The governmental, corporate, and consumer sectors of the economy are ALL addicted to debt growth fostered by artificially low interest rates.

Falling interest rates

The Fed wants to wean everyone off easy money. The problem is, everyone is behaving as if easy money will never end.

Central bankers can’t act normally when private and public debt levels are abnormally high and projected to go much higher. The Fed wants to keep hiking rates to discourage, in former Fed chairman Alan Greenspan’s words, “irrational exuberance.”

But going one hike too far or too fast risks triggering a deleveraging event that brings about another financial crisis.

At its most recent policy meeting, the Federal Open Market Committee (FOMC) vowed to be “patient.” Minutes released last Wednesday show the Fed citing “a variety of considerations that supported a patient approach to monetary policy at this juncture as an appropriate step in managing various risks and uncertainties in the outlook.”

Cutting through the dense Fedspeak, policymakers essentially said they put their rate hiking campaign on hold due to risks in the economy.

Left unstated were possible policy concessions made to Wall Street and Washington.

Perhaps Fed officials got spooked by the sharp stock market correction in late December. Perhaps they succumbed to political pressure from the Trump administration’s “Plunge Protection Team.”

Continue reading: https://goo.gl/7JaqAY

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