The Fed’s Forever War Against Savers
The war on savers rages into its second decade.
And yesterday Field Marshal Powell vowed indefinite bombing, shelling, machine-gunning and bayoneting… until the white flag rises over enemy lines.
It is war to the knife… and from the knife to the hilt.
The only peace terms he will accept are these:
Complete, undiluted and unconditional surrender.
These hoarding hellcats must be vanquished. And their cities must be sowed with salt… as triumphant Rome vanquished Carthage… and sowed it with salt.
Here is yesterday’s dispatch from headquarters:
We are going to be deploying our tools — all of our tools — to the fullest extent for as long as it takes… We are not thinking about raising rates; we are not even thinking about thinking of raising rates.
Zero Rates Through at Least 2022
Powell and staff indicated they will clamp rates to zero, or near zero… through 2022.
We wager rates will remain clamped to zero longer yet.
Deflation hangs over the battlefield like a thick cloud of chlorine gas. And the Federal Reserve’s 2% inflation target appears more wishful than ever.
We do not expect any rate hikes until it lifts. And we hazard little will lift until 2022 has passed.
Meantime, Marshal Powell reminded us yesterday that the pre-pandemic 3.5% unemployment rate yielded little inflation.
He suggested, that is, that unemployment could sink below 3.5% before inflation menaced.
But it could be a long, long while before unemployment drops to pre-pandemic levels.
As we recently noted:
After the last financial crisis, over six years lapsed before employment fully recovered — 76 months.
If we assume a parallel recovery… pre-pandemic unemployment would return in 2026.
Of course comes our disclaimer: Pre-pandemic unemployment would return before 2026.
We simply do not know. Nor does anyone.
But who can say if pre-pandemic levels of unemployment will ever return?
The Fed Doesn’t Expect a “V-Shaped” Recovery
Even Powell himself is nagged by doubts:
Unemployment remains historically high. My assumption is there will be a significant chunk … well into the millions of people, who don’t get to go back to their old job… and there may not be a job in that industry for them for some time.
The Federal Reserve therefore fears an arduous and protracted recovery. This is the argument of one Joseph Brusuelas, chief economist at RSM:
It is clear that the Fed does not anticipate a V-shaped economic recovery and is positioned to move forcefully to support the economy…
Adds Charlie Ripley, senior investment strategist at Allianz:
The Fed understands we are just in the beginning phases of the economic recovery and making rash changes to policy or forward guidance is premature at this time.
The Federal Reserve’s fears may well prove true…
We have cited evidence recently that each recession is fiercer than the previous. And that additional debt is required to put down each successive menace.
Comparing the 1990, 2001 and 2008 Recessions
Once again, Michael Lebowitz and Jack Scott of Real Investment Advice:
- The [2008–09] recession was broader based and affected more industries, citizens and nations than the prior recessions of 1990 and 2001…
- The 2008–09 recession and recovery also required significantly more fiscal and monetary policy to boost economic activity…
- The amount of federal, corporate and individual debt was significantly lower in 1990 and 2001 than 2008–09…
- The natural economic growth rate for 1990 and 2001 was higher than the rate going into the 2008–09 recession.
“The economic growth rate going forward may be half of the already weak pace heading into the current recession,” these gentlemen conclude.
We in turn conclude that zero interest rates will be with us for years… as will the warfare against savers.
The Fed Will Keep Buying Ammunition
But the enemy of the saver is the ally of the speculator.
The Federal Reserve intends to purchase roughly $120 billion of Treasury notes and mortgage-backed securities each month of the year.
Its balance sheet may swell to 40% of the United States economy by year’s end.
What percentage of the United States economy did it represent in 2007?
A mere 6%… if you can believe it.
These assets represents ammunition in support of Wall Street.
And as long as the Federal Reserve rains down ammunition upon savers… Wall Street can advance under the covering fire.
Powell insists he’s battling for the economy’s life.. If my policies prosper Wall Street, be it so, says he (with a wink and a nod):
We’re not focused on moving asset prices in a particular direction at all — it’s just we want markets to be working, and partly as a result of what we’ve done, they are working.
Just so. But the stock market has evidently advanced too far. And the stock market has evidently advanced too fast.
The Market’s Worst Day Since March
Today the market took to its heels… and fell into panicked and headlong retreat.
The Dow Jones pulled back 1,861 points on the day. Both the S&P and the Nasdaq took similar trouncings.
The S&P did, however, manage to hold the 3,000 line.
The combined rout nonetheless represents the market’s greatest daily plunge since mid-March… at the height of the havoc.
The reasons on offer in the mainstream press reduce to two:
A) Yesterday Powell’s dour comments emptied ice water upon the heads of sunny-siders expecting the “V-shaped recovery.”
B) A resurgence of coronavirus cases following reopenings may delay additional economic progress.
Texas, Arizona, Florida, North Carolina and California — among others — report what the journalists like to call “alarming” increases.
“This Thing’s Going to Linger Longer Than Probably the Market Had Thought Of”
And so, says Mr. Dan Deming, managing director at KKM Financial, reports CNBC:
“You’re seeing the psychology in the market get retested today” as traders weigh the recent uptick in coronavirus hospitalizations and a grim outlook from the U.S. central bank… “The sense is maybe the market got ahead of itself, which makes sense given the fact that we’ve come so far so fast.
“The reality is this thing’s going to linger longer than probably the market had thought of.”
But the stock market should take heart:
The full arsenal of the Federal Reserve is in back of it.
Savers, meantime, must only despair:
The full arsenal of the Federal Reserve is against them…
Managing editor, The Daily Reckoning