An Irrelevant Fed?

Yes, after awhile John Hussman really starts sounding like a permabear. But when we seem to be teetering on the brink of recession, it’s increasingly tough to paint that as a fault. From his weekly market comment:

Pop Quiz

How much “liquidity” has the Federal Reserve “pumped” into the $12.7 trillion U.S. banking system since March 2007?

a) $1.2 trillion, which banks have used to firm up their balance sheets

b) $600 billion, which banks can now use to make new loans

c) $16 billion, all of which has been drawn out of the banking system as currency in circulation

If you answered c, move to the head of the class. Investors who answered a or b have not only been misled by analysts and media stories, but have no idea how irrelevant the Fed’s actions are likely to be, except on short-term market psychology. [link]

Looking at the bizarre melt-up we witnessed last week, the reaction earlier this fall to Bernanke’s testimony, and the buzz now making the rounds that we might get a 50bp cut (egads!), it’s pretty hard to argue: the Fed obviously still has an impact on short-term sentiment.

But doesn’t influencing short-term sentiment sort of pale in comparison to, you know, actually fighting inflation while protecting the soundness of our financial system?

P.S. Citigroup economist says that by June, interest rates will be a full point lower than where they are now.  Well, if we get 50bps shaved off now, and we see some more selling in February/March (remember this year?), that’s not actually a very bold prediction.

[tags] Fed, Federal Reserve, Bernanke, interest rates, economy, banking, finance, sentiment, inflation [/tags]

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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