Fed Minutes of 13th - 14th June 2017: Crash 4Q17-2H18

Thursday, July 06, 2017 // Written by Enzio von Pfeil

We focus on a) the reduction in the Fed's balance sheet, b) the Fed's concerns about low inflation, and c) her concerns about high asset prices and financial stability. 

  1. Our positions.  We already have given you our views on all three areas, namely
Balance sheet reduction. We already have suggested that the Treasury has a greater say in this matter than the Fed does.  Here is what we spotted in the Financial Times (FT) of 7th June,p. 18: "Ultimately, the degree of (monetary) tightening will depend on choices the Treasury makes in managing its stock of outstanding debt, which is unaffected by whether the central bank is buying or not. In other words, the Fed has decided  on the impact of quantitative easing  by manipulating the term structure of the Treasury's liabilities, but the Treasury will have to decide on the impact of quantitative tightening when the Fed stops buying." 

inflation. The Fed's inflation  fears are anachronistic, they are based on a 70-year-old framework, the Philips Curve, one that is irrelevant to today's globalization and increased "technologicalisation" of production of goods and services. Because the Fed is trying to repair an electric Tesla (i.e. today's inflation issues) with a horse buggy repair manual (Philips curve), its efforts at stemming inflation are doomed. She, thus, will overshoot, will raise Fed Funds far too much. That will choke America's fragile economic recovery, thereby worsening her Economic Time®. Thus, the Fed will continue its stellar track record of "wrongness", one which we already have traced for you over the past 50 years...

Strong rises in Fed Funds rate.  The Fed's median projection for 2017 is 1.38%. In 2018 it will lurch by a further 55% to 2.13%, and by 2019, it will stand at 2.95%, representing an annual gain of a further 38%. This means that between the end of 2017 and the end of 2019, the Fed Funds rate will have more than doubled, i.e. from 1.38% (2017) to 2.95% (2019).  See what me mean by how the Fed can choke American growth, will worsen her Economic Time®?

High asset prices and financial stability.  Markets will discount this overshoot/slowdown scenario just mentioned under  "inflation" during 4Q17, so expect  market crash come 4Q17 - 1H18. 

Three loans crises looming. On 29th June 2017 we suggested that the following "volcanoes  will erupt  4Q17 - 2Q18: student loans; car loans and home loans.  

2. Fed Fog.  

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