Peter Schiff in the above video discusses how the Fed came out and basically admitted “We’re Screwed” in a May 17 meeting, the minutes of which were only released after a FOIA request was filed (h/t ZeroHedge). In the meeting minutes, the Fed essentially promised to continue its current inflationary monetary policy until it finally works:
Based on economic forecasts, and in light of ongoing economic weakness, continuing fiscal policy restraint, and the recent downturn in inflation, it is likely that current policy accommodation will continue for one to three years. When policy accommodation ends, the Fed’s actions are likely to be linked to improved economic activity, which will serve to cushion fallout. The Fed is expected to communicate its intentions to the markets to help avoid sudden shocks.
However, the Fed pointed out significant “regime uncertainty” (including due to Obamacare), as Robert Higgs has described the phenomenon:
Small business owners are generally apprehensive to grow and increase spending. They continue to look for more positive signs in the economy, and they lack confidence in Washington’s ability to resolve federal budget problems or formulate and follow a sustainable fiscal policy….
Almost every member bank still highlighted significant concern over the implementation of the impending health care legislation and its potential material impact on business confidence….
On the housing market “recovery”, the Fed expressed worries about what would happen if/when interest rates rise:
Interest rate increases could damage the current momentum.
There are potential risks associated with current policy. The Fed’s securities purchases have reduced mortgage yields and, to a lesser extent, Treasury yields. Current low bond yields are disruptive to management of fixed-income portfolios, retirement funds, consumer savings, and retirement planning. They may encourage unsophisticated investors to take on undue risk to achieve better returns. MBS purchases account for over 70% of gross issuance, causing price distortion and volatility in the MBS market. Fixed-income investors worry that attractive mortgage-backed securities are in very tight supply. Higher premium coupons carry too much exposure to prepayments, potentially led by new government support programs for housing. Many are concerned about the Fed’s significant presence in the market. They have underweighted MBS in favor of corporate, municipal, and emerging-market bonds. There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.
The Fed points out:
Banks have played a critical role in society’s economic foundation for hundreds of years. The challenge today is that there exists a perception, largely rooted in the events of 2008, that some banks are so large, complex, and interconnected, that governments will have no choice but to “bail them out” to avoid substantial economic harm to society as a whole.
But then in outlining more of the risks of its own policies, states:
Further, current policy has created systemic financial risks and potential structural problems for banks. Net interest margins are very compressed, making favorable earnings trends difficult and encouraging banks to take on more risk. The Fed’s aggressive purchases of 15-year and 30-year MBS have depressed yields for the “bread and butter” investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk. Finally, the regressive nature of the artificially compressed savings yields creates pent-up demand within bank deposit portfolios; these deposits may be at risk once yields begin to rise and competitive pressures increase.
In other words, the Fed’s policies are incentivizing riskier behaviors that might lead to another round of bailouts for the “too big to fail” banks. Finally:
Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses. Given the Fed’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.
Since that meeting, interest rates have risen. What is Paul Krugman’s response to this? He mocks:
Interest rates are rising! Head for the hills! OK, maybe not quite yet.
Don’t worry about it, he says. Why not?
[T]his looks like a market that has upgraded its estimate of the chances that the Fed will tighten too soon.
(Even though the Fed has repeatedly promised to keep the printing presses going until it finally works.) This could be easily fixed, Krugman argues, if the Fed would just reassure the markets that it is going to keep aggressively inflating:
So unless Bernanke and company mean to signal their intention to tighten much too soon, and derail recovery, they had better start getting their message out better.
The title of his post is – and Cool Hand Luke fans will recognize the allusion – “What We Have Here Is A Failure To Communicate”.
Or maybe the Fed has been communicating just fine and we really are just screwed, thanks to the very same Fed policies Krugman wants it to continue, the same way the 2008 financial crisis was precipitated by the housing bubble caused by the Fed’s inflationary monetary policy that Krugman was advocating it undertake specifically and explicitly in order to create a housing bubble (see my book on his record).