On Sunday, March 12 at 6:15 p.m. ET, the Federal Reserve and Treasury Department began their latest lie…
The banking system was crumbling around them after the failures of Silvergate Bank and Silicon Valley Bank.
So the Fed and Treasury stepped in to stop the bleeding. They announced the creation of a “Bank Term Funding Program.”
This emergency lending program made additional funding available to U.S. banks, savings associations, credit unions, and other eligible institutions.
This was to ensure banks had the ability to meet the needs of all their depositors, who were suddenly trying to withdraw funds.
Another purpose of the fund was to instill confidence in the banking system.
This money showed the financial community that the Fed was there in cases of emergency. And that, in turn, would prevent a larger financial crisis.
The fine print said:
The Federal Reserve is prepared to address any liquidity pressures that may arise.
If you think that sounds open-ended, you’re right.
As it turned out, this was just the opening gambit of the Fed and U.S. government.
In this two-part essay, I will delve into the gritty details of what the Fed has been doing since these two major U.S. banks collapsed. And I’ll explain what their actions mean for you and your money in this critical phase of the Great Distortion.
The Fed’s a Hypocrite
As you may know by now, the Fed has been raising interest rates since March of 2022. The reason for the rate hikes is to fight inflation and bring it down to the 2% target level.
In just a little over a year, the Federal Open Market Committee (FOMC) raised the Federal Funds rate from 0 to 4.75%. The latest rate hike came on March 22. That’s when the Fed raised the rate by 0.25%.
The decision means the Fed is in what I call Stage 1 of its three-stage pivot back to cutting rates. Stage 1 is a decrease in the size of rate hikes. And it indicates that the Fed is becoming less aggressive with its interest rate policy.
You can see the progression and size of the Fed’s hikes in this chart:
The Fed will eventually hit what I call Stage 2 of its pivot, or rate neutrality. It means a pause in rate hikes.
Until then, the Fed is on track to keep raising rates – but probably not for much longer. Let me explain…
Here’s what Jerome Powell, head of the Fed, said after the latest FOMC meeting in March:
Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.
The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.
Powell’s statements at that time implied that we could see rising rates for longer. Yet, he said this as the banking crisis was still unfolding.
You see, hiking rates is one form of tightening the money supply. Higher rates mean money is more expensive to borrow.
While the Fed has been talking tough about fighting inflation, it’s also been contradicting itself…
Due to the chaos in the banking sector, the Fed had to instill confidence in the financial system and markets. It needed to provide liquidity.
So, the Fed turned to another of its policy options. Printing money.
Specifically, it created money to lend to banks.
That decreased the cost of money.
Fabricating money is also loosening monetary policy. So, the Fed went against its own action of tightening the money supply.
Last Friday, the March’s payroll figures registered a slower increase in jobs than previous months. Powell and the Fed watch that monthly report to see if the labor market is cooling off. This is one of the signs they look for in order to pause rate hikes, or enter Stage 2.
Overall, the Fed’s money printing and the labor market cooling off are two reasons Stage 2 will happen sooner rather than later. The Fed could even pause rate hikes as soon as May or June…
The Fed Is Engaging in Quantitative Easing
I wrote about the Fed’s money printing measures during a financial emergency in my most recent book, Permanent Distortion.
Without a significant monetary policy and debt overhaul, another crisis is inevitable. Markets will tank at first, or periodically. Then banks and corporations will again turn to governments and central banks to save them at the expense of the real economy.
This is exactly what happened in the wake of the SVC crisis, banks turned to the Fed and government for help – and got it.
In the wake of the recent banking turmoil, the Fed redeployed a policy called quantitative easing, or QE.
That’s when the Fed creates cash to buy bonds from banks, inflating the money supply.
According to the Bank of England, QE is how central banks create money digitally in the form of “central bank reserves.” To execute QE, central banks buy government bonds and other securities with this money.
QE accomplishes three things:
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It provides investors and traders liquidity and confidence during periods of turbulence.
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It creates demand for bonds, which raises their price, and lowers their yield or rate.
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It increases the price of financial assets other than bonds, such as shares. Here’s why. Say the Fed buys $1 billion worth of government bonds from a bank. In place of these bonds, the bank now has $1 billion in cash. And instead of keeping that cash, or lending it out, the bank can invest it in other financial assets such as shares.
Now, Fed officials aren’t calling what they are doing quantitative easing or buying bonds. They are calling it a 90-day emergency lending fund.
But what they are doing is creating cash to give to banks. In return, banks are posting their bonds as collateral.
What’s more, the Fed is creating a fabricated demand for bonds. This, in turn, causes bond prices to rise… and their yields to drop.
So what you need to know is that the Fed is both raising short-term rates and lowering rates for longer-maturity bonds. At the same time.
Sounds a bit sinister, right? Well, for the Fed, it’s business as usual.
That’s because what the Fed does really well – is print money.
If the Fed were serious about tightening monetary policy, then it would sell bonds…. or let bonds roll off its books. This practice is called Quantitative Tightening, or QT.
Right now, the Fed is hiking rates while still buying bonds. These are two polar opposite activities. And for now, the Fed is playing both sides.
Tomorrow, I’ll explain who the direct recipients of the Fed’s latest money printing are… what the Fed’s actions mean for your money… and how you can profit from the Fed helping Wall Street while squeezing Main Street.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins