Fed Exit Strategy: Grab the Kleenex, It's Going to Get Messy

Fatigue? Oh don't get tired yet, little Fed boys, you've still got some pumping and dumping to do.
No Sign Of Fatigue as Economists Weigh Recovery, Rate Policy (WSJ):

Yale University finance professor Gary Gorton calls it FCF - Financial Crisis Fatigue - a condition that strikes as people tire of talking about the financial meltdown.

But there’s no sign of FCF in St. Louis, where economists from around the country are considering the contours of the U.S. economy as it begins to pull out of recession. The discussions at the National Association of Business Economics annual meeting Sunday centered on the future path of monetary policy, the prospects for the financial and auto sectors, and the wounded U.S. job market. Most agree more difficult days lay ahead, despite the nascent recovery.

James Bullard, president of the Federal Reserve Bank of St. Louis, said the central bank will be looking closely at past experience when it determines when to begin raising interest rates from their current level of near zero.

By waiting two-and-a-half to three years after the end of the past two recessions to begin tightening policy, the Fed many have inadvertantly goosed the housing bubble that helped spark the economy’s current woes. Though he wouldn’t speculate on when rates would begin to rise, Bullock said the “too low for too long” argument is likely “weigh heavily” on policymakers this time around.

Bullard doesn’t vote on the policy-setting Federal Open Market Committee this year, but he will be a voting member next year, when economists expect rates to begin to rise.

Any rate hikes will be contingent on the recovery taking hold. And few believe the economy is completely out of the woods. Bullard says growth could reach 2.5% to 3% in the second half of this year, and even more in 2010. But he worries about the job market.

“I find it upsetting that we’re still losing jobs,” Bullard said.

Rising employment also will be crucial for the U.S. auto industry, still surviving on government largesse and fighting lagging consumer demand. George Magliano, an auto analyst at IHS Global Insight, said the sector is close to bottoming out, even though he expects demand to be weak for another 12 to 18 months.

“What we need are jobs,” Magliano said. “Once the job engine gets going, that will help.”

Bullard has officially positioned himself on Team Inflation with other Fed all-stars like Janet Yellen, Ben Bernanke, and Donald Kohn. I'm not sure if it is denial or stupidity at work here but I do know that St Louis Fed is now in the Jr Deputy Accountant punishment corner.

What happened to that jobless recovery bullshit they were pushing a few weeks back?

On the issue of a Fed exit strategy, I am always inclined to draw an inference between the Fed and fucking. I'm serious (forgive me, I'm a bit of a skeeze and you know you love it so STFU). They talk about "pulling out" and "tightening" policy and all of that glory-be-to-the-central-bank bullshit but imagine the Fed as an over-eager 15 year old humping his girlfriend in the back of Dad's Le Sabre. Do you think *he* is going to pull out in time? Yeah right and same with these money-printing maniacs. They are delusional, and too busy patting themselves on the back for saving our economy (that same one they destroyed, of course) to notice or acknowledge the painfully obvious trouble yet to come.

Here's to hoping the Fed ends up with it on their hand at a minimum otherwise we're fucked and not literally.

Anyway. I found this great bit on the subject from Al Walsh I thought was worth sharing:

We begin with a doubt about the one now on the table. In the popular version, the more the recovery seems real, the more investors fear real inflation. This drives them to buy gold. Of course, it should drive them to sell US Treasury bonds too – which hasn’t happened. Nor has inflation gone up. And if this view were correct, we should begin to see remedial measures from the US central bank. The Fed should soon begin to withdraw its monetary stimulus, returning the economy to a kind of normalcy it hasn’t seen in years. The risk, not insignificant, is that Fed economists will err. They may loosen monetary policy too slowly or too quickly. Asked about the risk, Janet Yellen, President of the Fed’s San Francisco branch, promised to avoid the error of 1937 – she will not “tighten policy too soon, aborting the recovery.”

Gold bulls are counting on her. And they may be right. But here on the back page, we add a nuance. We’re not surprised by an occasional Fed error. What surprises us is the rare accidental success. There are 500 basis points between zero and 5%. It would take a miracle for central bankers to find exactly the rate the market needs precisely when it needs it most. The ‘37 error, for example, might have been a success. At least it sped up the process of liquidation so the decks were clear when the post-war boom finally came.

Maybe we’ll get lucky and the Fed will make the same error again. Not likely. This time they’ll make a different error – adding too much cash and too much credit for too long a time. Today’s ‘recovery’ is based on hot money from the feds. It’s a fake. It won’t cause real growth. When this becomes clear, commodities will sink – along with stocks…and gold. Central banks, ignoring the futility of their hot money program so far, will add even more hot money. Eventually, the hot money will cause inflation to rise and gold to ‘melt up.’ Gold bulls will be proven more right than they imagine. But they may be proven wrong first.

I guarantee you the Fed will not pull the plug in time. Now the question here is: who is going to end up getting the load in their eye?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.