The thinking behind the Federal Reserve’s decision on Wednesday to taper its disastrous bond-buying program is pretty linear: The economy — the Fed thinks — is doing better, so interest rates no longer need to be rigged as much as they have been, and the financial markets will forgive the decision.
But there’s nothing straightforward about this. The Fed is actually screwed.
And it’s getting screwed in deeper each time the bubbly stock market acts irrationally exuberant no matter whether the news is good or bad.
As Ben Bernanke took $10 billion a month from Wall Street, sending stocks careening lower, seconds later he gave them back more than that with his promise of keeping rates near zero from here to eternity, creating Wednesday’s nearly 300-point jump in the Dow Jones industrial average to a record close, at 16167.97.
I’m surprised that Bernanke had the guts to cut $10 billion a month from his interest-rate manipulation at the last meeting of his tenure as chairman of the Federal Reserve.
But he really had little choice.
The bond buying, known as Quantitative Easing (QE), had been sopping up $85 billion a month in government bonds and mortgage securities, but it has done little to boost the moribund economy over its five-year history.
With this week’s decision, the rigging will now only cost the Fed $75 billion a month — money it is creating out of thin air, by the way.
Worse than its ineffectiveness, QE has become a massive wealth-shifting device. American savers have had their pockets picked while rich people have become wealthier — and emboldened — with the extra money QE has produced.
But probably of more concern to Washington is the fact that foreigners who invest in US government securities are starting to realize they too are being fleeced.
The interest rates they’ve received on their bond purchases are being kept artificially low simply because the Fed has been the shill in the crowd at each bond auction for half a decade.
Because of the ineffectiveness of QE, a potential revolt from foreign investors and heavy criticism from US politicians (and a possible Congressional investigation of QE), the Fed has been looking to scale back on the program.
But its timing has been off.
Rumors started last spring that QE would be tapered by September, but the Fed shocked the financial markets that month by doing nothing. Why? Because the springtime improvement in the economy, which was probably little more than a seasonal aberration, had faded by September.
So the Fed couldn’t pull the trigger. During the last month, the Fed has been given another opportunity to taper because the nation’s gross domestic product was reported as a stronger-than-expected 2.8 percent.
That’s not good growth, but it’s not horrible either.
And that was followed by a lucky break in the November employment report, when the Labor Department said 203,000 new jobs were created that month and the unemployment rate declined to 7 percent from 7.3 percent.
The Fed has been closely monitoring the unemployment rate — and it is perhaps the dumbest thing it can do.
So that 7 percent jobless rate in November was at least partly due to people giving up looking for work and, by the Labor Department’s definition, no longer being unemployed.
Bernanke isn’t just deceiving himself by thinking the glass is half full. It’s like he’s looking at a toaster oven and thinking he’s seeing a half-full glass.
But Bernanke was in need of an excuse to taper. The amount of bonds purchased through QE is reaching an astounding $4 trillion, and Congressional Republicans are starting up investigations on what the hell the Fed is up to.
If all of what I just wrote doesn’t add up to being screwed, the next part will.
Unless there is some profound and miraculous re-awakening in economic activity, the Fed during Janet Yellen’s first months will be facing another economic downturn.
Why? One, because bubbles die hard, especially at the end of the year, when professional money managers are trying to impress clients with their performance. But this is also one of those options and futures expiration weeks when money managers desperately try to keep stock prices elevated.
Bernanke also gave the taper-haters something to live for. He mentioned that the economy’s “continued progress is uncertain” and that the Fed would ramp up its bond buying if it becomes necessary.
Of course, Bernanke won’t be around to keep those promises. And Yellen might not be in the position to keep them for him.