Federal Reserve intervention in the U.S. financial system has increased since September, and the trend is expected to continue.
Fed Chair Jerome Powell admitted the dangers of an ever-expanding balance sheet all the way back in 2012 but seems to be strangely silent on the subject today.
Surging stock prices represent one area of the market experiencing excess and imbalance as a result of the Fed.
The Federal Reserve’s ongoing repo-mania has breathed new life into the U.S. stock market, instilling a can’t-fail attitude in the mind of investors who have seen their asset values levitate on an almost daily basis.
Fed Chair Jerome Powell doesn’t seem all too concerned about the excess spilling over into the stock market. But a closer look at a meeting transcript from 2012 reveals the Fed boss knows exactly what he’s doing – and the dangers that central-bank meddling poses to the stock market.
Powell Admitted The Obvious Long Before He Became Fed Chief
As ZeroHedge brilliantly pointed out on Wednesday, Powell knows what a ballooning balance sheet means for stocks and the economy.
How It Could Come Crashing Down
The Fed’s pursuit of inflation was at the heart of its policy shift last July when it slashed interest rates for the first time since the financial crisis. Apparently for policymakers, inflation isn’t rising fast enough. They arrive at that conclusion using manipulated measures of price growth like the core personal consumption expenditure index and the consumer price index.
Both numbers show extreme bifurcation between the real economy and the financial system. Excessive money printing tends to create deflation as banks hoard cash and prevent it from trickling down into the real economy. But actual inflation – the type experienced by average citizens – runs higher than what’s actually reported by the Labor Department. It’s just one of the reasons why real wage growth has stagnated for decades.
This bifurcation was recently explained by Ray Dalio, the co-chairman of Bridgewater Associates. In an article on LinkedIn, Dalio said central banks push free money onto financial institutions in a desperate attempt to boost inflation and growth.
Financial institutions have “an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up,” Dalio said.
The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it.
In Dalio’s view, money printing is an unsustainable form of stimulus and can no longer be prescribed like it was in 2008. It has not only created a bigger wealth gap between financial elites and the rest of the world, it has inflated a stock market bubble that has exceeded any other in history.
Unfortunately for the Fed, there’s no way to eject itself from the monstrosity it created in 2008 when it first unleashed QE. For many investors, the Fed’s actions in 2019 were evidence of systemic failure in the financial system.
Asset values won’t be able to maintain their trajectory for much longer in the face of slowing economic growth and dismal corporate earnings. Powell knew this back in 2012, but he’s unlikely to acknowledge it now that his optics (and position) have changed.
Trader Georgi Bozhidarov