FOMC Decision – Zero Surprise Policy

The Photocopier Remains On

As the WSJ’s trusty FOMC statement tracker reveals, the FOMC statements was once again almost an exact copy of the previous statement. As a result, there was nothing to surprise market participants, and the reaction to the statement was accordingly a big yawn. A quick overview over the changes (the old text is in brackets)

“Information received since the Federal Open Market Committee met in (March) April indicates that growth in economic activity has (picked up recently, after having slowed sharply during the winter in part because of adverse weather condition) rebounded in recent months. Labor market indicators (were mixed but on balance) generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising (more quickly) moderately and business fixed investment (edged down) resumed its advance, while the recovery in the housing sector remained slow.”

That’s it. Nothing else was changed (with he exception of the announcement of further ‘tapering’). Not that there was any reason to change anything, after all, the economic recovery remains as tepid as before, which is a direct result of the Fed’s interventionism and massive money printing over recent years.

Obviously, suppressing interest rates and printing money cannot create any wealth. All it can achieve is a reverse redistribution of wealth from later to earlier receivers of the new money, as well as exchanges of nothing (money created ex nihilo) for something (real resources), which leads to the misallocation of capital and represents an obstacle to all those engaged in genuine wealth creation. Moreover, the liquidation of capital malinvestment from the previous boom was arrested prematurely, and these old misallocations are now augmented by new, additional ones. This can for a time give the impression of a resumption of growth, as aggregate economic data reflect an increase in “economic activity”, but a great part of this activity in fact results in capital consumption, as economic calculation has been distorted by the manipulation of interest rates.

Taper, Taper …

In that sense, the only other change in the FOMC statement must be welcomed – with certain reservations as you will see further below – as  QE will be reduced further:

“Beginning in (May) July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month.”

Thus the direct injection of new money into the economy by the Fed (note that ‘QE’ by the Fed not only creates bank reserves, but concurrently creates new deposit money to the same extent, as the primary dealers are legally non-bank subsidiaries of banks) will decrease from $45 billion per month to $35 billion per month. A the moment, this makes however little difference to the pace of monetary inflation in the economy, because inflationary lending by the commercial banking system has resumed in parallel with the Fed’s ‘QE tapering’.

We have already reported on this phenomenon in early March (see: “An Overview of Recent Monetary Trends” for details). As we noted at the time, it was not yet certain in March whether the trend of bank credit creation increasing in parallel with QE tapering would continue:

“The most recent data show that the true broad US money supply has by now expanded to almost $10 trillion, with the year-on-year growth rate ticking up again slightly in January, but still remaining below the y/y growth rate recorded a quarter ago and a year ago. In short, the downtrend in the rate of growth in evidence since the end of ‘QE2’ has not really been interrupted. That may change if commercial banks increase their lending at a faster pace than the Fed reduces its securities purchases.  While bank lending growth has indeed picked up since the ‘taper’ announcement, it is too early to come to conclusions about it, as it is a fairly recent phenomenon that may yet be reversed.”