One of the top-selling Halloween costumes this year was a latex mask of Federal Reserve chairman Ben Bernanke's bearded likeness. Seems rather fitting, considering -- The economy-saving capabilities of the Federal Reserve are an illusory façade. For some, such a statement runs a close second to blasphemy. I say, let the facts, NOT blind faith, speak.
To wit: In the week ending Friday, October 31, the Dow Jones Industrial Average soared 11% in its strongest five-session finish since 1974. And, according to the mainstream analysts, the market's rise had everything to do with the 50-basis point cut in the Federal Funds rate. (October 29.)
"US rate cut sends market higher," wrote one popular news source. "The Fed has given the patient a lot of medicine; now we want to see the patient show a recovery." (Reuters)
And, from the October 29 Federal Open Market Committee press release: "Recent policy actions, including today's rate cut… should help over time to improve credit conditions and promote a return to moderate growth."
O.K. Now that you've read what the experts have to say, consider these next two news items AND the dates of their release:
- "As to actual interest rates, there is little to say except that credit is fundamentally easy and the Federal Reserve Board is determined to keep it so." (August 18, 1930 Barron's)
- "There is every warrant for belief that in due course, the [now lower] rate will provide a measure of real stimulation. History shows that cheap money always seeks an outlet, and what more naturally than in the stock market when feasible. The agonizing necessity or urge to liquidate that has prevailed for so many months is bound to pass. The broad factors point more logically to a period of accumulation than the inception of another severe and all inclusive liquidation movement." (May 11, 1931 Barron's)
Suffice to say, a "period of accumulation" did NOT emerge in 1931, or even a decade later. Widespread belief in the Fed's ability to rekindle the bullish fire via an easy-money spark persisted even as the Dow Jones Industrial Average continued to crash. In total, the 1929-1933 period of economic contraction known as the Great Depression saw the DJIA plummet 89% AND the Federal Reserve slash rates from 6% to 2.5%.
Nearly EIGHTY years later -- the Fed continues to wear its "mask" of monetary policy. Since September 2007, the central bank has reduced its overnight lending rate NINE times (425 basis points) to a five-year low of 1%.
At its onset, the September 2007 Elliott Wave Financial Forecast presented the following close-up of the "Unwonderful Wizardry of the Fed" and warned: "Any near-term positive response to a Federal Reserve rate cut will be short-lived… The Fed's power to hold up the economy and stocks has no basis in physical reality."
(NOTE from chart: A Federal Reserve rate cut from 6.5% -- To -- 1.25% from 2000 to 2002 proved impotent against the longest stock market decline since the Great Depression, the tech-bubble bursting, and a brief economic recession.)
Since the publication of the September Elliott Wave Financial Forecast, the violent downdraft of the U.S. financial crisis has plunged the U.S. stock market into bear market territory and triggered the worst credit collapse since the Great Depression.