Is The Fed Caught in a Corner?

Posted on Mar 10 2015 - 4:54pm by Sharpe Trade

Let me explain.

No, there is no time for that … let me sum up.

The Federal Reserve’s mandate, given to them by Congress is two-fold ….

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” – 1977, Amended Federal Reserve Act of the Congress of the United States of America

So in a word, they are looking for great employment, stable prices and they try to influence long-term interest rates.


So what’s the problem?

We had this little-bitsy crisis (you may have heard of it) in 2008.  It was the worst financial crisis we’ve had in the United States in about 77 years.  A bunch of banks and insurance companies thought it would be a great idea to sell stuff to people who couldn’t pay, or afford it, and then package those debts up into instruments and leverage them up to the moon. And then … then they passed those instruments back and forth amongst themselves like a game of hot potato until it blew up in their faces … and everyone elses faces.  I talked about this at length when I was writing at my old blogspot blog.

It was sort of a big deal.

So the Fed came along, and pulled everyone’s butts out of a fire, along with a $700 billion TARP program from Congress (Please remember Economics 101 that there is a FISCAL and MONETARY side to everything and that these two entities are separate.  I see people confuse the two all the time). 

People screamed and complained!  $700 billion!  Oh noes!  The Fed will kill us all!  The Dollar will collapses through the QE’s!!  The Quantitatives over the Bernank!  Money’s printing!!

PANIC Tarp Gold and Silver

TARP was paid back.  Incidentally, TARP was only as large as the approximate one year budget for the military of the United States.  I would have been more encouraged as an investor if TARP had been 3 Trillion.

But I digress.

TARP was paid back.

The U.S. Dollar never collapsed.  It rose.  Along with stocks.  Bonds, and everything with the exception of Silver and Gold (don’t worry guys, I’m sure at some point in the next 5,000 years your boat will come in).  The economy began to recover.  The problem is that they lowered interest rates to near zero.  Or a “Zero Interest Rate Policy” environment.  You may have heard of it

It was sort of a big deal.

So for eight years, no one has gotten jack-squat from their savings account.  The positive benefit, is that we weren’t all shooting each other with bows and arrows, because we hadn’t been sent back to the stone age via a Financial disaster.

Again … so what’s the problem?

The problem … is the Dollar.

Specifically … the   K I N G    K O N G     S T R O N G       U.S. Dollar.

U.S. Dollar – DX Futures (6 Hour Chart Back to 2014)

The U.S. Dollar .

I told the clients of my old service, Aileron Market Balance back in March of 2014 that there would be a return of King Dollar … and here we are.  I also told them the taper program would complete and here we are.

Now here’s the real irony of the situation.  Despite what the Peter Schiff’s and the Gold and Silver guys were telling you, the Dollar never collapsed.  Hyperinflation never came.  In fact, the U.S. Dollar rose like nuts and now … now the problem is the STRONG U.S. Dollar.

What is the Fed to do?  Have they painted themselves in a corner? What the Fed has to worry about now, is blowback loop, in both directions in regards the Interest Rate.

They Don’t Raise the Rate: The U.S. Dollar continues it’s powerhouse rocket higher as the the world suffers with the present condition, of stagnation (at best).  The U.S. continues to improve economically, albeit slowly.  This Dollar surge is hurting the rest of the world, and many corporations here in the U.S.  IBM has been complaining of this in the last three conference calls, if memory serves.  Thee is a compression problem in foreign currencies, which can lead to inflationary problems.  In turn, other countries, in essence, find it more difficult to sell things to the U.S. consumer.  At the same time, they would have to worry about an asset bubble truly starting to get nuts … from this point forward.

If they don’t raise the rate?  I see nothing that really slows this surge in the dollar.  This hurts other currencies.  Which eventually returns back to the U.S. economy, as people find it harder to sell us stuff.  Which does not fulfill the Fed mandate given to it by Congress.

They Do Raise the Rate: The Dollar continues it’s powerhouse rocket higher because of a raise in interest rates, as the world suffers with the present condition of stagnation (at best) in the rest of the world, while the U.S. surges ahead and improves due to the rate increase, economically. Now, the rest of the world is really screwed up because NOW, their currencies are really hammered as emerging markets become a disaster.

Which eventually returns back to the U.S. economy, as people find it harder to sell us stuff.  Which does not fulfill the Fed mandate, given to it by Congress.

Is the Fed caught in a corner?

Something else to consider …


Europe is trying to crawl out of it’s hole.  Europe may even be a good place to invest.  They are just now starting what the U.S. did in 2009.  The problem being, is that they want to lower the value of their currency to do it.

Which means …

You guessed it …

An even stronger U.S. Dollar.

Don’t get me wrong.  I never try to ‘fight the Fed’ as some do.  They make the rules, and have been inventive to date.  And I’m sure that in the future, they can find inventive solutions to present problems and issues.  But I can’t help but wonder if they haven’t painted themslves into a corner.

It’s sort of a big deal.

3 Comments so far. Feel free to join this conversation.

  1. investing early March 10, 2015 at 11:10 pm - Reply

    Every scenario presented above results in a stronger dollar. While studying tarp and trying to figure out impacts of rising rates I have come to the same conclusion… a stronger dollar.

    Aside from commodities, energy companies and huge multinational companies, I don’t think the markets will really be affected by strong US currency. Only time will tell.

  2. Reader April 5, 2015 at 1:04 pm - Reply

    The dollar is not rising vs rent or food. Gas a little but all the strong dollar seems to be doing is hurting profits.

  3. Loth April 22, 2015 at 12:13 pm - Reply

    I would like to be educated about how other countries find it more difficult to sell things to the U.S. consumer because of the Dollar surge?

    In my logic I would suppose the contrary: the stronger the Dollar the easier/cheaper the U.S. citizen buys stuff from overseas?

    Thank you!

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