Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed’s Next Move is to Ease U.S. Interest Rates

Interest-Rates / US Interest Rates Jun 22, 2010 - 08:32 AM GMT

By: Michael_Pento

Interest-Rates

The FOMC meets today to discuss their record-low interest rate policy. The announcement of their decision will be released on Wednesday. While no increase in interest rates is expected, there is little doubt amongst investors that the future direction for the central bank’s target rate will be up. In fact, Kansas City Fed President Thomas Hoenig has repeatedly expressed his desire for an increase in overnight lending rates to 1 percent from the current zero-0.25 percent range by the end of summer.


However, recent economic data including; the Philly Fed Index, first time jobless claims, Non-farm payrolls and retail sales are already pointing to a probable double-dip recession. Therefore, the Fed’s next move is more likely an ease rather than a tightening of rates.

But the ease won’t come in any of the traditional forms. The Fed isn’t going to reduce rates to a negative level. Charging people to deposit their money into a bank just isn’t going to be politically palatable. Our central bank will also not seek to once again dramatically increase the size of the Fed’s balance sheet. Although the Fed bought another $7.34 billion in Mortgage Backed Securities last week, even Mr. Bernanke won’t be foolish enough to buy up another $1.5 trillion of assets that he will not be able to dispose of in the future.

The next ease from the Fed will most likely be in the form of ceasing to pay interest on excess reserves. Since October 2008, the Fed has been paying interest on commercial bank deposits held at the central bank. But because of Bernanke’s fears of deflation, he will do whatever it takes to get the money supply to increase. With rates being near zero and the Fed’s balance sheet already at an intractable level, the only viable solution to fight Ben’s phantom deflation fear is for him to remove the impetus on the part of banks to keep their excess reserves laying fallow at the Fed.

If commercial banks stop being paid to keep their money dormant, they will find a way to get money out the door. They may even start shoving loans out through the drive-up window. Banks need to make money on their deposits (liabilities). If the don’t get paid by the Fed, they will be forced to take a chance on the consumer. After all, it has been made clear to them that the Fed and Treasury stand ready to bail out banks’ bad assets at any cost. So why not take the chance once again?

The statement from this month’s meeting of the FOMC will probably not indicate that interest will no longer be paid on deposits by the Fed to commercial banks. However, in the near future this strategy will be the most appealing method for the Fed to increase liquidity. Once Mr. Bernanke assents to the double-dip recession scenario, he will fight deflation by any means necessary.

Deflation is not a possible outcome if a central bank is willing to do whatever it takes to increase the money supply. The fed can buy every house on the market if it so desired and it could buy every dollar of our $13 trillion national debt. And while it is true Bernanke can’t force banks to lend, he can compel them to boost the money supply by removing any compensation involved from keeping the money multiplier in check. And even if there was no banking system or fractional reserve system in place, it would be a specious argument to make that inflation could not occur without having private banks involved.

According to Bernanke’s academic philosophy, expanding the money supply somehow equates to growing the economy. In order to grow the economy credit must be available, but much more importantly interest rates and the value of the dollar must be stable.

The current Federal Reserve Chairman is a student of the Great Depression. Although he will, unfortunately, most likely get a chance to study one first hand, this next one will be marked by inflation rather than deflation. Investors should be aware he will do whatever it takes to avoid a collapse of the money supply and a double dip in the economy. Part of his plan is to ensure there is not only plenty of money printed—that much he has already accomplished in spades—but that banks are also well incentivized to loan it out.

Be sure to listen in on my Mid-Week Reality Check and to follow my blog Pentonomics
Follow me on Twitter: http://twitter.com/michaelpento

Michael Pento
Senior Market Strategist
Delta Global Advisors
800-485-1220
mpento@deltaga.com
www.deltaga.com

With more than 16 years of industry experience, Michael Pento acts as senior market strategist for Delta Global Advisors and is a contributing writer for GreenFaucet.com . He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets. Mr. Pento has worked on the floor of the N.Y.S.E. as well as serving as vice president of investments for GunnAllen Financial immediately prior to joining Delta Global.

© 2010 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in