With the government finally addressing fiscal policy for first time in 8 years, the ball is now back in the Fed's court

One of the primary reasons why the Federal Reserve has become so powerful in the last two decades is because the Legislative and the Executive Branches of government have passed the buck of fiscal responsibility over to the hands of the central banks.  In fact, following the taxpayer funded bailout known TARP, the long-time Senator from New York publicly told the central bank it was their time to 'get to work'.

It appears that Democrats may be taking a more aggressive stand in urging the Fed to do more easing.

After 5-minute discussion of the economy, and the ongoing disappointing recovery, Chuck Schumer ended his query of Ben Bernanke at the Senate today with this memorable exchange.

His conclusion: “Get to work, Mr. Chairman.”

— CNBC

But sadly the lassitude of Congress only emboldened the Fed to enact monetary policies that have not only destroyed the economy and market systems, but have also made it impossible for the economy to ever function correctly without some form of continuous intervention.

President Trump however sees things a bit differently, and in just his first week in office has sought to remedy the government's apathy towards fiscal policy by starting the ball rolling for tax cuts, regulation cuts, a weaker dollar, and a tearing up of nearly all old trade agreements.

Mr Trump was scathing during the campaign about the increases in US national debt under Barack Obama, and the businessman at one point claimed implausibly that he would pay the entire $19tn stock off in eight years.

If this is indeed what the Republican-led Congress signs up to next year, it would represent a major shift at a time when organisations including the International Monetary Fund have argued in favour of greater budgetary support around the world.

The upshot for the Federal Reserve could be an acceleration of the return to more normal interest rates.

“Fiscal policy is coming back big-time relative to what we have seen in the past five or six years,” said Torsten Sløk, chief international economist at Deutsche Bank. “From a Fed perspective if fiscal policy is coming back the corollary to that is monetary policy will have to do less easing.”

— Financial Times

And thus we come front and center to the showdown between the Fed's Janet Yellen, and the new President following a decade of complete power and autonomy over all policies dealing with the dollar.  And going into this week's FOMC meeting, it is the Fed that holds the key to whether Donald Trump's programs will be in synch with what the central bank intends for the economy, or whether they respond with interest rate hike salvos that could make The Donald's vision for America that much harder.

The US Federal Reserve will stop its mortgage and mortgage-backed security (MBS) reinvestments in April 2018 in order to prevent further expansion of its $4.2-trillion balance sheet, a negative signal to the US real estate market.

After the 10-year commercial mortgage-backed securities (CMBS) issued at the height of the mortgage meltdown in 2007 expire this year, real estate prices are likely to tumble due to a projected decline in effective demand. Higher Fed rates will also contribute to a contraction in demand as credit affordability is declining, meaning that already sky-high US property prices might be peaking.

The Fed has been relentlessly criticised by President Donald Trump and Republicans in Congress for having dramatically expanded its balance sheet during the past eight years to no avail as economic growth remains feeble and domestic US investment is low. While the new White House administration is tackling the issue of Fed independence, and the GOP-controlled House is weighing a Fed reform, the regulator might seek to reduce its bloated balance sheet as soon as it can.

Since the Great Recession, the Fed has increased its base interest costs twice, in December 2015 and December 2016; another two hikes are expected this year. The normalisation of monetary conditions has made mortgages more expensive. For example, after the Fed moved interest rates from 0.25-0.5pc to 0.5-0.75pc last month, the average cost of a 30-year fixed US mortgage increased by roughly 1pc, from about 3.50pc to 4.50pc.

— Sputnik News

Despite his campaign rhetoric, that at times has been contradictory in relation to what Trump needs the Fed to do to weaken the dollar while at the same time cutting back on its 'bubble formation', the central bank is in a bind that is partially of their making, and partially the fault of Congress.  And in this catch-22 is the unenviable task for the Fed to not admit to the fact that their monetary policies have utterly failed in bringing back normalcy to the markets, to also try to justify their desires to bring normalcy to interest rates, when anything they do except more of the same will bring down the house of cards in a New York minute.