Stuck on the Zero Bound and Dissent

So, the FOMC spoke and its statement more or less conveys the fact that we are reaching an end game of sorts for Fed policy while voting members are simultaneously beginning to break ranks.



First, the “exceptionally low levels for the federal funds rate at least through mid-2013” language is simply another way of stating that they are stuck at the zero bound.



Some are interpreting this statement as a “bold pledge” that the Fed is prepared to face the weak economic climate and ready to be accommodative for a longer period than many expected.



Nonsense, the Fed is simply stating that the economy is far weaker than they had anticipated and that they are stuck with ZIRP ala BOJ over the last score of years.



This type of sentiment hardly inspires confidence.



Voting against the change in language were three members including Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser a further indication that the Fed hardly has a collected sense of the direction of policy and the outlook for the economy.

Will Bernanke Jump the Shark Tomorrow?

As most business and finance media onlookers gear up for another dose of Fed speak tomorrow with particular interest in the Feds response to the current debt downgrade, now might be a good time to weigh the potential that Bernanke’s Fed might craft policy language that effectively conveys a sense of their ineffectiveness resulting in a loss of credibility and confidence.



Given the fact that the Fed has pulled out all the stops over the last few years implementing QE1 and QE2 as well as a vast series of extraordinary measures (principal repayment treasury purchase program, discount window lending, commercial paper lending facility, etc. etc.) , it would seem that any additional unconventional policy action geared toward propping the flagging economy or mitigating the debt downgrade may start to look desperate and futile.



Will the Fed push policy action one step too far?



Are we on the verge of a Japanese-style moment whereby the majority of participants clearly recognize that the problems we face are bigger than the Fed and its cockamamie policy tools?

Fake It Till You Make It Fed Policy

Listening to Bernanke over the last two days it should be clear that the Fed is going to go for another round of quantitative easing.

While the evidence for the next round of QE was only slight when I first noted Federal Reserve Bank of Atlanta Dennis P. Lockhart’s “posture of flexibility” position back in March, the potential became a near certainty by May with the oil spike, reemergence of the European debt crisis, the debt ceiling uncertainty and most importantly the double dip for the U.S. housing market.

As these and other issues work to shake confidence, it’s easy to see that the Fed will simply continue to work to bolster confidence using the only remaining tool it has, namely it’s “balance sheet”.

One way or another the Fed will implement an accommodative policy until it feels the “real” economy is function normally and can withstand shocks on its own.

The problem is though, there is nothing normal about an economy with a central bank lording over it just waiting for signs of failure and prepared to pump in liquidity at a moment’s notice…. The Fed is not instilling confidence, it’s creating dependency.

Japan’s “Lost Score” should provide ample evidence that a phony centrally manipulated economy is not the right solution to our economic problems.

What would be best for the economy now (and all along since 2008) is for the Fed to let the economy go and for all participants to face reality head on regardless of the recognized losses.

If hard times and recession comes as a result, so be it.