Fed cuts rate to less than 0.25% - promises to flood the world with money

Well, folks, history was made today. The US now has an official "range" of between 0% and 0.25% for the Fed Funds interest rate.

Of course this is no different than what the effective interest rate has been for a while (so the Fed is, as always, merely following the market), but now it's official.  

Perhaps our fellow readers from Japan can tell us what comes next.

Bernanke is trying out a gigantic academic experiment to see if past excesses and malinvestments caused by interest rates set too low and money made too cheap can be fixed by setting interest rates even lower and money even cheaper.

I see this path as fraught with risks and I would have preferred that we wring out the bad debts as quickly as possible.  

Instead we get this collection of policy failures guaranteed to either make this whole thing last a lot longer than it otherwise would, make it all worse by compounding past mistakes, or both.

We begin with the headlines announcing the new Federal Funds interest rate and setting expectations for future rate changes:

FOMC cuts fed funds rate to range of 0% to 0.25%

FOMC to keep funds rate 'exceptionally low' for some time 

The statement "for some time" is meant to signal to the big players in the markets that they can count on the Fed to keep the rates low for a long time and to carefully telegraph any future rate changes well in advance giving these people time to get out of the way later on.   This act of 'telegraphing' is a continuation of one of the greatest failures of the Greenspan era.  Whereas before I said the Fed really only has two tools in their toolbox, setting the price of money and the amount, they used to have three tools, the third one being surprise. 

But surprise turns out to be frowned upon by politicians and Wall Street types so it was abandoned by Greenspan, which is too bad because the lack of surprise is what got us here.

Specifically I am thinking of the water-torture of 14-in-a-row 'measured' 0.25% interest rate increases that Greenspan started and Ben continued in a lame attempt to carefully deflate an out-of-control credit bubble. 

Since all the market participants were 100% certain that the next hike was going to be 0.25% and that no surprises were coming they did not change their behavior, risk continued to build, and derivatives grew to extinction-level proportions. In short, the bubble got worse, not better.

And what of the rest of the Fed words? 

FOMC statement details plans for quantitative easing

Fed to keep its balance sheet at 'high level' 

Fed to flood financial system with money

FOMC to purchase large quantities of agency debt, securities

Fed considers buying longer-term Treasurys

Here all I can tell you is back up the truck and load it with anything that can be shipped and is priced in dollars - they're throwing Uncle Buck under the bus.  Gold is my personal favorite because it is liquid across all currencies.

I was wondering what would happen to the free money being given to the big banks via the Fed's negative interest rate program.  Here they put my troubled mind at ease:

The board also established interest rates on required and excess reserve balances of 1/4%.

What this line means is that regardless of the effective fed funds rate the Fed will be paying 0.25% to banks on all their reserves, whether required or 'excess'.  If you loan money at 0% and then pay 0.25% when it is handed back to you for keeping in your institution, that means you are offering a negative rate of interest. This Negative Interest Rate Policy, or NIRP, sets us apart from even the Japanese whom, to the best of my knowledge, never attempted this.

The Fed is going to print money out of thin air as fast as they possibly can until we get back to a healthy level of "growth", whatever that means.

Every single one of those statements signals the most aggressive monetary printing ever considered or undertaken by the US Federal reserve.

It is history in the making.  Keep a journal because these are the days upon which everyone will look back and ask, "what happened?"

At the end of it all, what this boils down to is a desperate attempt to return to "growth" and to how things used to be.  There is no outward questioning of whether this is a good idea or not, it is simply assumed that everyone is in agreement on this matter.

But a blind return to growth at any cost will cost us much and yield little.  Perhaps worst of all, it will steal from other more obviously productive investments that we could and should be making at this stage.