Loading ...The notion that the Federal Reserve would not respond to declining stock prices – under any circumstance – has become heresy. There was no outrage when the Greenspan Fed manipulated the yield curve and adopted an asymmetrical policy approach to underpin the securities markets. Where was the outrage when Bill Dudley (while at Goldman Sachs) and others specifically called for the Fed to adopt policies to spur mortgage Credit expansion for the purpose of systemic reflation after the collapse of the “tech” Bubble? There was even minimal debate when the Bernanke Fed employed unprecedented post-mortgage finance Bubble Credit allocation and reflationary measures. And it was as if I was the only analyst that had an issue when Bernanke later stated the Fed would “push back” against a tightening of financial conditions, essentially signaling the Federal Reserve would not tolerate a market correction.
I am again reminded of the late Dr. Richebacher’s important insight that asset inflation is the most dangerous type of inflation, certainly riskier than consumer price inflation. There is (was) general agreement that more than a modest increase in consumer prices is undesirable and would provoke tightening measures from responsible central bankers. But with rising asset prices almost universally viewed constructively (while confirming the soundness of policies), there is no constituency motivated to rise up and demand measures to contain inflating asset prices and Bubbles.
It is now a consensus view that the Federal Reserve (and global central bankers) should backstop financial markets to promote economic growth and wealth creation. The Fed, market participants and most pundits prefer to ignore that such a doctrine places the central bankers at the epicenter of Credit, resource and wealth allocation. Such a position ensures the Fed now wades chest deep in the political muck. It’s been a slippery slope I’ve been chronicling now for over 20 years.
The Fed’s market-centric and interventionist approach has essentially supported incumbent Presidents and Washington politicians. From this perspective, it is clearly “establishment” and susceptible to “deep state” innuendo. This regime is today challenged by President Trump, with his penchant for tariffs, confrontation, and scathing attacks on the Fed and its Chairman. The President is essentially blackmailing the Fed: Play ball or you’ll be blamed, ridiculed and targeted, with clear risk of losing your jobs along with the institution’s coveted independence.
http://creditbubblebulletin.blogspot.com/2019/08/weekly-commentary-dudley-sticks-his.html