Federal Reserve Destroys Its Credibility and Independence

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After months of telling the world it is in the process of unwinding its $2.054 trillion balance sheet, the Federal Reserve announced August 10 it is reversing course from a slightly tightening bias to a neutral stance by “reinvesting principal payments from agency debt and agency mortgage-backed securities.” Starting next week, the Fed will use the estimated $10 billion a month it receives from these principal payments to purchase Treasuries with maturities between 2 and 10 years.

In the current Weekly Forecast I explained that Uranus in Aries exactly squaring the Fed’s natal Pluto Tuesday together with the cycle of Jupiter opposite Saturn reflected that the August 10 FOMC meeting would be a crucial test for gauging the central bank’s independence. Once again the Fed demonstrated their readiness to appease Wall St. as well as those in Washington who want monetary policy to do what has become politically unpalatable through fiscal policy.

In “Bernanke Tells Wall Street The Fed’s Hands Are Tied” I explained why there is little meaningful action the Fed can take to boost the economy with such an extremely accommodative monetary policy already in place. But the Fed showed it was more concerned with expressing the energies of the Jupiter/Saturn opposition.

Oppositions require balancing two seemingly disparate yet complementary energies. Planets in Aries tend to be too impatient to take a wait and see approach and planets in Libra can be too eager to please and overly concerned with what other people think. By reinvesting the principal, Bernanke believed he could appease Wall St.’s desire for additional stimulus (Jupiter) without being accused of printing more money. Saturn in Venus-ruled Libra reflects the pressure to placate everyone by keeping the Fed’s balance sheet neutral. Venus (money/banking) and Mars (action) in Libra for the first time since Lehman Brothers collapsed is once again motivating the Fed to pull out all the stops to keep the economy from deflating.

With his Sun in Jupiter-ruled Sagittarius opposing natal Jupiter in Mercury-ruled Gemini, together with Mercury and Venus in Sagittarius, Bernanke’s brain will automatically default to inflating the money supply. Natal Mars and Neptune conjoining in Libra means his actions inflate bubbles.

Jupiter in Aries opposite Saturn in Libra together with Venus and Mars in Libra reflects that Bernanke had to appease other FOMC members and FRB presidents who are uncomfortable with the Fed owning mortgage securities on its balance sheet by rolling over the principal on these securities into Treasuries so the Fed’s holdings of agency debt and MBS on the Fed’s balance sheet continue to shrink.

Saturn in Libra squaring Pluto in Capricorn also reflects the Fed’s decision to buy Treasuries which serve as an alternative currency for financial transactions. The Fed’s purchases will lower Treasury yields which in turn will push more investors into buying mortgage securities to obtain a slightly higher yield. This would reduce borrowing costs that are already at historic lows.

Saturn square Pluto indicates Fed policy is only benefiting a limited number of borrowers and corporations who have the very best credit and sufficient collateral. Since these companies and borrowers already have locked in low interest rate loans, most are taking advantage to refinance or hoard cash while they can sell debt at rock bottom rates. Johnson & Johnson (JNJ) just sold $550 million in 10 year bonds at 2.95% and an equal amount in 30 year bonds paying only 4.50% interest!

The Fed is pumping up profits at the largest and wealthiest corporations and financial institutions at everyone else’s expense, busting Libra’s scales from being tilted so far in one direction. Savers and particularly seniors living on a fixed income are suffering. To add insult to injury, the Fed won’t even directly purchase Treasuries from the government. Instead the primary dealers who include “too big to fail” Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), and Morgan Stanley (MS) purchase Treasuries from the government and sell them for a profit to the Fed.

Saturn square Pluto represents fear of sovereign debt. Yet since this cycle began in November 2009, fear of government deficits and lack of fiscal restraint has caused more investors to plough more and more money into…government debt! Jupiter opposing Saturn at the same time Saturn squares Pluto this month exaggerates economic fears. The Fed’s move Tuesday is more likely to frighten banks and companies into hoarding more cash while consumers are focused on reducing their debt and saving.

Uranus in Aries squaring the Fed’s natal Pluto brought some unexpected consequences following the Fed’s announcement to buy Treasuries. Investors began buying 30 year bonds in response to the Fed announcing they will purchase “longer-term” Treasuries, not waiting for the detail sheet released by the NY Fed later Tuesday afternoon outlining the maturities to be purchased. After initially rebounding 100 points following the Fed’s announcement which turned the Dow positive for a second, the market turned down for the rest of the week.

With Uranus strong at zero degrees Aries (the world point) this week, markets reversed and volatility spiked. Instead of pleasing the markets, the Fed’s action was interpreted as a downgrade of the U.S. economy that increased fears around the globe.

Uranus symbolizes the rebel, the person who’s willing to go against the grain. Kansas City FRB president Thomas Hoenig is the rebel with a cause on the FOMC. Hoenig becomes more vocal in his dissent at every meeting. In a must read speech entitled “Hard Choices” given at a town hall meeting in Lincoln Nebraska today, Hoenig said he worries the FOMC’s actions only add to the “uncertainty.”

Jupiter last opposed Saturn during the recession of 1990-1 while Saturn opposed Pluto in 2001. Hoenig cites those past times as examples when interest rates were kept too low for too long. The Fed ended up manifesting what it most feared and is danger of creating another financial crisis through its current actions.

To prevent the Fed from spawning yet another financial crisis, Hoenig has got to get other members to agree with what he’s advocating:

“I am advocating a policy that remains accommodative but slowly firms as the economy itself expands and moves toward more balance. I advocate dropping the “extended period” language from the FOMC’s statement and removing its guarantee of low rates. This tells the market that it must again accept risks and lend if it wishes to earn a return. The FOMC would announce that its policy rate will move to 1 percent by a certain date, subject to current conditions. At 1 percent, the FOMC would pause to give the economy time to adjust and to gain confidence that the recovery remains on a reasonable growth path. At the appropriate time, rates would be moved further up toward 2 percent, after which the nominal fed funds rate will depend on how well the economy is doing.”

Uranus takes 7 years to transit one sign. Hoenig notes that in the spring of 2003 (after Uranus entered Pisces - the sign of market bubbles), was just before the Fed lowered rates to 1% to prevent Japanese-style deflation. Uranus moving back into Pisces tonight until March 11 reflects FOMC member James Bullard’s stance that “The U.S. is closer to a Japanese-style outcome today than at any time in recent history.” As former Fed researcher Stephen Stanley told Bloomberg, the only difference between the Fed’s “quantitative easing” and Japan’s is that Bernanke refers to it as “credit easing.”

Beyond consumer price inflation, I have explained the dangers of excluding asset price inflation in monetary policy. Hoenig explains that with the CPI over 219 vs. 18 in 1945, there is no fear of deflation. Ironically, as the Fed announced it would start purchasing Treasuries, Bloomberg reported Tuesday that Warren Buffett has shifted the duration of Berkshire Hathaway’s (BRK/A) Treasury holdings which would indicate he believes interest rates will rise sooner than expected.

Saturn completing its waning square to Pluto this month exaggerated by Jupiter and taken to the extreme by Uranus indicates that the market’s obsessive fears about deflation will begin to dissipate. As a member of the FOMC in 2003, Thomas Hoenig admits he learned the lesson taught by Saturn square Pluto: “low rates contributed to excessive debt and leverage among consumers, businesses and government.” And now the Fed has fed a bubble in bonds that will likely end just as ugly as the other bubbles before it.

Being Jupiter-ruled, Bernanke prefers a pain-free quick fix. But the alignment of these planets at the beginning degrees of cardinal signs for the first time in centuries signals the old consumer and housing economy dependent on financial alchemy is dying; to be transformed into a new industrial and technology based economy over the next decade. Just as it took years for the bubble to build and burst in 2008, it will take time to recover from such extremes.

There are portions of the economic hangover that only time (Saturn) will heal. For example, the friction in the housing market caused by mortgage liens beyond the economic value of properties is preventing the normal flow of transactions. Only time will cause all of the involved parties to accept losses and get this portion of the economy moving again. Extremely low mortgage rates have reached the point of no longer being an effective stimulant. The lesson Thomas Hoenig is teaching us is that it’s time to let time heal the economic wounds, as Fed action has proven to no longer be effective.

Federal Reserve: December 23, 1913 6:02 PM EST Washington, DC
Ben Bernanke: December 13, 1953 time unknown Augusta, GA
Thomas Hoenig: September 6, 1946 time unknown Fort Madison, IA

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