by David Stockman, via Lew Rockwell:

It doesn’t get more pathetic than this. After the Fed’s “disappointing” 25 basis point rate cute, divided FOMC vote and failure to guarantee more cuts just around the corner, Pusillanimous Powell saw the markets barfing and therefore stumbled forth with the following 20-word ignition switch:

It is certainly possible that we’ll need to resume the organic growth of the balance sheet sooner than we thought.”

And then the algos were off to the races the moment Powell implicitly confirmed that QE4 is indeed on the way. At exactly 2:50pm stocks spiked and the dollar slumped.

So there can no longer be any doubt at all that the Mighty Fed has been reduced to the status of Wall Street’s pitiful bitch and that the Donald might as well fire Chairman Powell and replace him with, well, a weathervane.

After all, it doesn’t get more equivocal than this:

“There will come a time, I suspect, when we think we’ve done enough. But there may also come a time when the economy worsens and we would then have to cut more aggressively,” said Mr. Powell at a news conference Wednesday. “We don’t know.”

He got that right. The Fed heads have no idea what they are doing – so they are taking their cues from the most greedy, aggressive traders on Wall Street who believe the Fed owes them nothing less than a stock market which rises every single day.

That is to say, hyped-up on massive leverage through publicly traded options and privately bespoke structured trades, their level of entitlement, greed and recklessness knows no bounds.

So when the Fed chairman confesses “we don’t know” what he actually means is the Keynesian fools in the Eccles Building don’t know they have become virtual captives of the speculative mania now loose in the financial markets.

After all, it’s plain as day that a 25 bps rate cut or $75 billion overnight TOMO loan (temporary open market operation) to Wall Street dealers would be of no benefit to the main street economy whatsoever; and that when it comes to countering the global headwinds emanating from the world’s $85 trillion trade war rattled economy, which Powell mentioned repeatedly at his presser, they might as will be pissing into the wind.

So why did the Fed panic into supplying $75 billion of overnight TOMO to the dealer markets in the last two days consecutively if such accommodation obviously had nothing to do with its dual mandate regarding main street price stability and maximum employment?

Most assuredly it is not because of a liquidity shortage in the inter-bank markets. The latter are still sitting on $1.35 trillion of excess bank reserves deposited at the Fed and useable at a moments notice. So if any bank is really short, a slight rise in the effective federal funds rate would have easily resolved the pressure.

But the reason the GC (general collateral) repo rate has soared to as high as 10% this week – besides the seasonal pressure owing to Q3 corporate tax payments and the US Treasury’s $150 billion cash replenishment drive – is that traders and speculators are stepping up their efforts to fund yield curve and other technical trades/speculations in the repo market, thereby driving up the scarcity value of such collateral.

According to Bloomberg, a crowded gamble at the moment is 2s/10s steepeners in which traders short the 10-year and fund a oversized long-position in the two-year note with repo. Essentially, it’s a capital-free trade (i.e. nearly all the long side funding is borrowed) in which gamblers will laugh all the way to the bank if their bet is correct and simply unwind it if the curve steepening doesn’t materialize.

However, this lucrative trade is thrown into a cocked hat if Wall Street gamblers have to pay 10% for the repo to fund the long-side of their bet.

So the fools in the Eccles Building came charging to the rescue with an overnight TOMO for the purpose of stabilizing the money markets and enforcing their misbegotten peg on the Federal funds rate. Yet the latter is now only a tiny part (@$75 billion) of the multi-trillion money market because the Fed destroyed the old fashioned fed funds market when it pumped nearly $3.5 trillion of fiat credit into the banking system under QE.

Accordingly, the banks are drowning in excess liquidity. The historical benchmark price for overnight money in the interbank market (i.e. fed funds) is merely a vestigial relic and is essentially pinned at the Fed’s target rate by the stupidity of paying banks upwards of $45 billion per year to keep funds parked under the IOER umbrella. Moreover, upwards of 60% of Fed funds trading is actually attributable to the speculative activities of the government-backed Federal Home Loan banks.

Needless to say, the much larger repo and funding markets outside of the eligible inter-bank markets have a mind of their own and are now struggling to price overnight funding at a high enough level to clear the decks by attracting new funding and depressing speculative demand.

So what have our Keynesian fools done in the last few days?

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