Pay no attention to that man behind the curtain.
I’m shocked, shocked to find that gambling is going on in here.
These are not the droids you’re looking for.
In the movies, Frank Morgan, Claude Rains, and Alec Guinness deliver lines meant to mislead with flair or humor or command. Federal Reserve bankers possess no such panache, exhibit no disposition for irony, and lack the confidence necessary to convince.
“These actions are purely technical measures to support the effective implementation of the [Federal Open Market Committee’s] monetary policy,” the Fed explained about its decision to buy treasuries and continue loans to financial institutions, “and do not represent a change in the stance of monetary policy.”
Only they do. The Fed announced plans to buy $60 billion in Treasury bills, atop $20 billion in other securities, per month. The Fed also announced the continuation of its intervention in the repurchase (repo) agreements market by committing to daily overnight loans of $75 billion and less periodic (generally twice weekly) infusions of $30 billion for longer-term loans, such as 14-day repos.
The ostensible reason for the aggressive bond-buying campaign involves the Fed replenishing its portfolio. This occurring amid rate cuts shows a clear desire to stimulate the economy even if the Fed characterizes the Treasury bill buys and the continuation of the repo loans to financial institutions, as “technical measures” not representing “a change in the stance of monetary policy.”
The Fed last injected itself in the repo market in 2008, and it stopped its aggressive buys of Treasury bills several years ago. The repo intervention and massive buy of Treasury bills represents a change in monetary policy even if the stated intent offers a different rationalization. As the Wall Street Journal points out, “Make no mistake: the Fed is buying a lot of securities — more than most analysts who closely monitor bond markets anticipated. In addition to $60 billion in Treasury bills, the Fed is buying up to $20 billion every month in a wider range of Treasury securities to replace maturing mortgage securities. By way of comparison, the Fed bought $85 billion a month in Treasury and mortgage securities between December 2012 and October 2014 in its largest and final round of quantitative easing.”
In other words, the Fed buys almost as much in securities as it did at the height of quantitative easing and injects itself in the repo market for the first time since the last downturn. But they do not wish to alarm by anyone drawing a parallel between the financial meltdown of the previous decade with the jitters occurring today. So the Fed refuses to call quantitative easing quantitative easing and insists that the obvious change in policy represents a continuation of policy.
Valid reasons exist for the Fed restocking its portfolio and for issuing repo loans. But this does not negate the fact that injecting hundreds of billions of dollars into the economy reorients monetary policy. And perhaps the Fed holds a strong reason for not spooking the markets by acknowledging a return to quantitative easing. But this is still a return to quantitative easing, and saying it is not does not make it not.
Though parallels exist between Fed actions then and now, the state of the economy in 2008 versus now provides a key difference. The Dow Jones closed near an all-time high yesterday, the most recent unemployment statistics show rates at historic recorded lows, and the gross domestic product grew by a far from robust but hardly anemic 2 percent for the second quarter. Perhaps learning the lesson of the last recession compels the Fed to take preventative rather than reactive measures.
Still, if a downturn occurs one wonders what gimmicks remain to respond. With the federal deficit exceeding $1.2 trillion for the fiscal year just past, the Fed repeatedly cutting rates, and the infusion of money from the central bank into the economy, the solution to a future economic problem may prove worse than the ailment. And then shocked, shocked responses to the predicament, entreaties to pay no attention to the man behind the curtain, and Jedi Mind Tricks do not sound to even naïve ears as reasonable as they did when the economy chugged along.
Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of six books.