US Federal Reserve Impossible to Carry Out Drastic "Tapering" (2 - End)
It's hard to say the Fed has the courage to reduce the money supply to the market. There is a risk that the US economy will fall into recession.
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Chairman of the Federal Reserve Board Jerome Powell announced the results of the board's meeting on March 20, 2024 in Washington DC, United States.
The Covid-19 pandemic has caused the Federal Reserve to buy bonds from the market again. Now, the question arises, when will the central bank United States start reducing bond holdings? Another question, will the reduction or tapering be carried out drastically?
The statement by the Chairman of the Board of Governors of the Fed Jerome Powell on March 20 2024 sparked speculation that the US central bank would accelerate the reduction of money supply to the market or tapering off. "It is appropriate to slow the pace in the near term," said Powell after the March 2024 edition of the Fed's Board of Governors, FOMC, meeting.
Also read: US Economy Addicted to Easy Money (1)
Indeed, Powell did not provide certainty when the reduction in the money supply to the market would begin. A number of parties, including PIMCO Managing Director Tiffany Wilding, suspect that the Fed will accelerate tapering off. With Powell's statement, Wilding suspects that the Fed could decide on tapering at the FOMC session at the end of April 2024.
Because of these signs, I don't see any need to rush into taking steps to start easing monetary policy.
Initially, the director of the investment management agency was among those who believed that tapering would start in July 2024 and be completed in December 2024. At least 66 percent of respondents to a Reuters poll in early March 2024 had the same opinion as Wilding. Respondents to the poll are market strategy formulators in various investment and financial institutions.
Brokers on the New York Stock Exchange, United States, on March 20, 2024.
The Fed's policy is again difficult to understand after the statement by a member of the Fed's Board of Governors, Christopher J Waller. At an event in New York on Wednesday (27/3/2024), Waller said there was no need to rush to change monetary policy.
He said the economy and labor market continued to improve. On the other hand, inflation continues to be under control even though it has not yet reached the target. "Because of these signs, I don't see the need to rush into taking steps to start relaxing monetary policy," he said.
Addicted to bailouts
The Fed has repeatedly supplied money to the market. Since the era of Alan Greenspan's leadership until Ben Bernanke as Chairman of the Fed's Board of Governors, the pattern known as easy money has continued.
Bernanke led The Fed before, during, and after the 2008 crisis. The crisis was marked by the bankruptcy of Lehman Brothers. If the investment bank was allowed to go bankrupt, other companies could follow suit. Bernanke, who studied the malaise of 1929, concluded that bankrupt banks and companies must be supported to prevent a deeper economic recession.
During the period from 2008 to 2014, the Fed printed money more than three times the total amount of money printed in the first 350 years of the US' existence.
During the 2008 crisis, the Fed supplied money to the market through Wall Street. Former Fed officials who moved to the stock exchange, such as Andrew Huszar, were asked to buy hundreds of billions of U.S. dollars' worth of U.S. government and private bonds. The Fed also bought bonds related to mortgages, even though such bonds were not considered a suitable investment vehicle. Furthermore, the mortgage crisis was the beginning of the 2008 crisis.
Also read: New York Community Bancorp Crisis, Signals Fragility of the US Financial Sector
In 2008, the Fed played an active role as a player in the stock market with a mission to inject funds into the market. The Fed's action raised stock indices and company values. This also made the buying and selling of securities very rampant.
Banking institutions, which should be carrying out their intermediary functions, instead forget their main duties. Banks have become very busy with buying and selling stocks on the stock exchange because the profit obtained is sure to soar thanks to the increase in stock prices and the popularity of buying and selling securities. According to Huszar, the profits from these actions are greater than the disbursement of bank credit to customers.
Then Bernanke was blamed. He was deemed too easy to bail out bankrupt companies without preventing criminals in the financial sector, bankrupting the companies. Bernanke argued that it would be even riskier for the economy if the bailout action was not taken because it would harm the entire society.
The US market and financial regulator has long been concerned about companies that are deemed too big and could have systemic effects if allowed to go bankrupt. There is a term for it: "too big to fail."
Also read: Fed Interest Rates Will Stay until 2025, the Effect is Relatively Neutral
Restrictions on credit were still being issued when the recession subsided in 2010. The head of the Federal Reserve Bank of Kansas, Thomas Hoenig, attempted to resist these actions. In 11 FOMC meetings, he refused to approve additional money supply from the Fed to the market.
For him, easy money without strict rules and supervision will give rise to the perception that business bankruptcy will tend to be bailed out by the government. Such a perception will not make bankers and the financial industry run the financial sector carefully.
Brokers on the New York Stock Exchange, United States, on March 20, 2024.
Hoenig, among other things, reminded us of the bankruptcy of Penn Square Bank. According to him, the bank went bankrupt due to reckless management. Recklessness is likely to continue to occur if easy money continues to flow.
In 2010, he suggested that easy money policies should be ended and there should be discipline in the financial market. Unfortunately, he lost the vote. During Bernanke's tenure, the Fed injected 3.5 trillion US dollars into the market.
Also read: Why are the world's super conglomerates busy selling shares
"During the period 2008 to 2014, the Fed has printed money more than three times the total amount of money printed in the first 350 years of the US's existence," said Christopher Leonard, investigative journalist, when talking about his book published January 11 2022 entitledThe Lords of Easy Money: How the Federal Reserve Broke the American Economy.
In his information search for the publication of his book, Leonard heavily relied on Hoenig's information. One of Hoenig's reasons for rejecting the printing of new money is that it triggers inflation. When inflation occurs, the middle and lower classes, as well as those with fixed incomes, will suffer losses.
Minimal supervision
Easy money also causes income inequality to increase. This condition is related to the emergence of unscrupulous bankers who do not perform their role as intermediaries properly. They, as well as speculators on the stock exchange, only move around easy money in the market. The money does not trickle down to the general public.
New York stock exchange, United States, on March 21, 2024.
As a result, inequality is widening. The Gini coefficient, which measures the degree of income inequality, increased from 0.43 in 1992 to 0.47 in 2022, meaning that there has been an increase in income inequality.
Hoenig stated that his rejection of the 2010 FOMC meeting was because he did not want to be involved in actions that would create a recession time bomb and lead to the emergence of problematic bankers. Hoenig's warning has not been heeded until now.
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Furthermore, according to Hoenig, banking supervision is also being weakened. The Dodd-Frank Act, a regulation on financial institution supervision, was dismantled during the era of President Donald Trump.
Hoenig also said that the flow of easy money, including through the Fed's direct involvement in the market by providing bonds, would be difficult to reverse. This fact shows that Bernanke's plan for tapering never really worked.
Chairman of the Federal Reserve Board Jerome Powell announced the results of the board's meeting on March 20, 2024 in Washington DC, United States.
Bernanke announced a gradual tapering plan in 2013. When the Fed tried to do it, the market immediately reacted negatively with indexes falling. Bernanke then suddenly canceled tapering.
Economist Mohamed Al-Erian watched from the stock exchange floor, the index turned stable after Bernanke called off tapering. This is another proof that US financial institutions are completely addicted to easy money.
Also read: KKN, Latent Dangers of the United States Financial Industry
Bernanke's successor, Janet Yellen, then Powell, also did not taper. In fact, for pandemic reasons, Powell even poured 5 trillion US dollars into the market.
As a result, the US has been plagued by inflation since 2021. Unfortunately, Yellen who has become the US Secretary of the Treasury and Powell who became the Chair of the Board of Governors of The Fed have yet to implement tight monetary policies. Until two years ago, they believed that inflation was only temporary.
Office of the United States central bank, Federal Reserve, in Washington DC, November 2020.
Waller's statement this week shows that inflation is still out of control. The Fed and the US Department of Treasury only recently acknowledged the inflation pressure in March 2022. To control it, the Fed raised the core interest rate from 0.25 percent to 5.5 percent, as it is now.
Unfortunately, the increase does not mean that money is really drawn from the market. Because, the US government continues to issue new bonds and accumulate debt. Currently, the US government's debt has exceeded 33 trillion US dollars.
Also read: Inflation in the US does not subside, global markets are in turmoil
The amount of debt in the US is even greater if private and household debt is included. However, the total US gross domestic product is only 25 trillion US dollars.
High interest dilemma
Despite increasing money and debt, economic vulnerability in the US does not seem to end. When the Fed raises the core interest rate, US banks go bankrupt. Once again, the Fed and US regulators have to bail out the banks.
Silicon Valley Bank Branch Office in Massachusetts, United States, in March 2023.
The bankruptcy of Silicon Valley Bank (SVB), Signature, Silvergate was resolved through funding. Recently, the bankruptcy of New York Community Bank (NYCB) was also resolved in a similar manner.
The US government has been trapped in the negative effects of its loose monetary policy that has been put in place for decades. The negative effects of easy money have not been resolved, especially with the banking system's intermedia function being neglected. The banking system remains involved in buying and selling securities, which makes the banking system trapped in the rise of US interest rates.
Also read: Don't be lulled by "Soft Landing", the US Economy Could Collapse
When banks' assets pile up in the form of bonds, there is a potential loss due to the drastic drop in the value of bonds held by banks. The value of bonds is inversely proportional to the increase in interest rates. This potential loss for banks triggers the withdrawal of funds by customers.
In an article on May 5, 2023 in The Barron's, Hoenig mentioned bankruptcy cases at banks that were only limited to SVB and several other banks. However, the poor financial condition that is more or less similar has affected the banking industry in the US in general.
In the case of SVB, Hoenig also observed that the series of bankruptcies of US banks was due to the banking supervision factor becoming sterile. He sees that financial supervisors have no concern for the health of the management of financial companies.
Mission Impossible
Now, Powell has indicated that tapering will be carried out. However, Powell is very careful when talking about tapering. Powell even said that tapering would be preceded by the US Treasury Department, not within the Fed. This also shows that the Fed will not dare to carry out tapering.
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With the current situation, it is difficult to say that the Fed dares to reduce the supply of money to the market. There is a risk that the US economy will fall into recession.
On the other hand, the policy of easy money cannot continue. A major dilemma has arisen in the US economy. If the Fed releases its obligations, who will absorb them? Because the bonds are essentially of low value and some are issued by unclear companies.
A warning also came from Larry Fink, who leads BlackRock, the investment management institution with the largest assets under management. He stated that the US cannot continue to rely on debt.
Not all markets, domestic or international, believe in US Government bonds. There may come a time when US debt has minimal international buyers. Hoenig has also long warned that there will be a saturation point of the US dollar if it continues to be printed.
Also read: US Economic Sanctions are More Bad (1)
So, what is the end to the ironic tale of US financial institutions addicted to easy money? The chain of bankruptcies of American corporations, especially accompanied by the decrease in the use of the US dollar in the international market, is not difficult to imagine.
Nassim Nicholas Taleb, a mathematical statistician and market actor, has warned that the US bankruptcy case is only a matter of time. Only a bitter bankruptcy can push for a correction of the poor financial situation in the US. (AP / AFP / REUTERS)
SIMON SARAGIH, Journalist for Kompas 1989-2023
