QUESTION: Dear Mr Armstrong,
Not sure if I am understanding it correctly. Is the FED currently between a rock and a hard place? The FED is not able to cut rates (implement QE) due to the current pending/ongoing crisis of the US pensions, and they cannot raise interest rates as it’s going to cause more USD liquidity stress. However, rates are still going to rise as they have lost control of the interest rates. May I know is it possible for them to change the rules and allow pension funds to invest in the equity markets like how the Japanese are doing it so that they can achieve the higher returns for the pensions as well as hoping to keep interest rates as low as possible? Then this will be part of the energy (funds) pushing US equity markets to all-time highs?
Appreciate the daily education.
ANSWER: The Fed realizes that QE has been a complete failure. What they are looking at is the 1942-1951 period when the Treasury ordered the Fed to create a peg and support the bond market at benchmark rates of interest thereby installing caps. This is slightly different than QE which buys in debt on a wholesale basis. The Fed may try the peg and this will result in a bifurcation of interest rates where private sector rates will rise and public rates will become fixed even on the 2 to 10-year paper. I believe they will come under pressure to try to prevent the national debts from exploding, which will introduce yet another crisis of inflation. By trying to peg the rates, when the market smells a rat, they will end up in a position of having to monetize the entire debt. We have some very interesting times ahead.