International Forecaster Weekly

Feds Are Still In Control

... if the Fed is so firmly in control of the economy, the real question is “Who's in control of the Fed?” The nominal answer is the Fed chair, of course.

James Corbett | January 15, 2014

If any further proof were needed that the Fed's injection of phony liquidity from nowhere is still what's driving the US economy, it arrived on Monday. That's when the President of the Atlanta Federal Reserve, Dennis Lockhart, delivered a speech where he merely hinted that the Fed would continue tapering its monthly bond purchases this year.

    The markets didn't have to think about that one very long. Within hours, the Dow had plummeted by a triple-digit sum and the S&P was off by 1.3%, their worst performance in months. Clearly the ending of the QE stimulus can only mean one thing: the beginning of the end of the bond bubble. And no one's going to want to be in equities or bonds when that bubble bursts. (Recall the words of the Bank of England's “Director of Financial Stability” Andy Haldane last year: "Let's be clear. We've intentionally blown the biggest government bond bubble in history," Haldane said. "We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted.")
    It's obvious who's still in control of the economy: the Fed. Every pronouncement of every member of the board of governors and every president of every reserve bank is being scrutinized and parsed for any potential impact on the future of the QE liquidity injections for the precise reason that everyone who's anyone know that this is precisely what is keeping the already wildly-inflated markets afloat. Musings about the unprecedented P/E ratios in equities are also beginning to make investors skittish, so any upsetting of the apple cart at this point (no matter how slight) may be enough to halt the gravy train altogether.
    But if the Fed is so firmly in control of the economy, the real question is “Who's in control of the Fed?” The nominal answer is the Fed chair, of course. At this point all eyes are on Janet Yellen as Bernanke's right hand woman who is about to step up to the plate and take over the reins from the Bernanke, but those eyes might be better employed by scrutinizing her Vice Chair, Stanley Fischer. His career in banking has been long and chequered, having supervised the Ph.D. thesis of both Ben Bernanke and Mario Draghi. He was former Chief Economist of the World Bank and First Deputy Managing Director at the IMF before becoming the Governor of the Bank of Israel in 2005, where he served for the last 8 years. And now, in one of these unusual cross-country banking moves that seem to be becoming more common (think Mark Carney going from the Bank of Canada to the Bank of England last year), he's coming to take over the number two position at the Fed.
    Don't let that number two fool you, though. The powers that shouldn't be love to put the real people of power and influence in the number two role, much as they did with installing their willing accomplice Ayman al-Zawahiri as second-in-command of Al Qaeda to control the Osama bin Laden pawn/dupe's purse strings and operations. Do you think that Fischer, the person who literally supervised the former Fed Governor and many others who are now coming up the central banking hierarchy, is really going to be taking orders from Janet Yellen? Neither do I.
    Of course we'll have to wait and see what Yellen / Fischer and co. come up with for the years ahead, but another observation that should give us pause for thought: it was only months after taking over as Fed chair in 1987 that Greenspan faced a major economic crisis (Black Monday), and only months after Bernanke took over that the housing bubble peaked and began the great unwinding that led to the 2008 crisis. So how long will Yellen have before she sees another big economic calamity, and what else could that calamity be but a popping of the bond bubble?