"The Fed Opens Up - Maybe?"
Sydney M. Williams
Today, at 2:15PM, Fed Chairman Ben Bernanke will hold his first press conference as Chairman of the Federal Reserve. The idea, I guess, is to remove some of the mystery from the Fed’s operations. Whether that is a good idea and how open the Chairman chooses to be remain to be seen. As Laszlo Birinyi mentioned in a piece yesterday, the last time the Fed made a change to information dissemination was in February 1994 when they decided to disclose any change in policy immediately. That they now do, but the minutes of the meetings are released with a lag time of two or three weeks, presumably allowing for the purification that a scrubbing of the data allows.
“Transparency” became a buzzword during the 2008 elections. But somehow the concept became lost. The country, as David Brooks wrote yesterday in the New York Times, lacks faith in its institutions: “The country is anxious, pessimistic, ashamed, helpless and defensive.” People feel confused. For example, Mr. Brooks adds: “Sixty-three percent of Americans oppose raising the debt ceiling; similar majorities oppose measures to make that sort of thing necessary.” It could be that the Administration, Congress and the Fed decided they had little to lose in asking Mr. Bernanke to try his hand at instilling confidence. If that is the case, the Chairman has his work cut out.
The recession ended two years ago, according to the National Bureau of Economic Research (NBER,) with the second quarter of 2009. Thus we are in the 8th quarter of recovery; yet, apart from the fourth quarter of 2009, GDP growth has been feeble. Unemployment, while improving recently, remains high at 8.8%. In the past year, the dollar has declined 15%, while rising energy prices and food inflation have hurt the poorest of our citizens.
There are questions that should be asked at the press conference: If the Fed’s mandate is to provide stable prices and full employment, how do you explain today’s asset inflation and high unemployment numbers? With gasoline prices up thirty percent in the last year and with food prices rising, why do you ignore their potential inflationary impact? As James Grant pointed out in his most recent newsletter, “QE1 failed to deliver vibrant growth or full employment” and since QE2 was implemented, stocks and commodities have risen, the dollar has declined; Treasury bond yields are higher and economic growth has been anemic. Will there be a QE3 and what will its purpose be? Can you remove the training wheels from the bicycle (ending QE2) without the vehicle wobbling? Why have you let banks that were too big to fail in 2008 become bigger? Why are the banks that benefitted from tax payers’ bailouts not encouraged, through tax incentives, to lend more aggressively to small businesses and start-ups, instead of to private equity or for M&A, activities that are often job killers, not job creators? How do you justify keeping short rates so low that seniors are suffering, leaving them with two unattractive choices: eating into their capital or speculating in the equity markets?
The Federal Reserve is two years shy of celebrating its 100th birthday. It was created in 1913; the impetus was the panic of 1907. Its responsibilities have expanded over the years. Its main duties today are to promote sustainable economic growth, maintain full employment and provide stable prices – goals that can be at odds with one another.
What we experienced in 2007-2009 was a balance sheet recession – too much debt, too freely offered, spent inflating house prices. In the aftermath of the credit collapse, households and non-financial businesses, deprived of liquidity, adjusted their habits, increasing savings and reducing spending. Government, of necessity (at least initially,) did the opposite, increasing both borrowings and spending. We have reached a point where the Fed must consider reverse engineering what they have wrought, but doing it in such a way so as not to catapult us back into recession. Otherwise, the cure risks becoming worse than the disease.
The Fed’s press conference offers the opportunity to bring more openness to what is an institution shrouded in mystery. My concerns, though, are two-fold: The Street may misinterpret his words and second, the time horizon of investors is short, while the policy needs of the country demand perspective, patience and longer time frames. Despite the series of questions I raised earlier, I worry: will Mr. Bernanke, in opening himself to the clutches of the press, fall victim to the peripatetic nature of its reporters, or will he be able to hold his ground?
Thought of the Day
“The Fed Opens Up – Maybe?”
April 27, 2011Today, at 2:15PM, Fed Chairman Ben Bernanke will hold his first press conference as Chairman of the Federal Reserve. The idea, I guess, is to remove some of the mystery from the Fed’s operations. Whether that is a good idea and how open the Chairman chooses to be remain to be seen. As Laszlo Birinyi mentioned in a piece yesterday, the last time the Fed made a change to information dissemination was in February 1994 when they decided to disclose any change in policy immediately. That they now do, but the minutes of the meetings are released with a lag time of two or three weeks, presumably allowing for the purification that a scrubbing of the data allows.
“Transparency” became a buzzword during the 2008 elections. But somehow the concept became lost. The country, as David Brooks wrote yesterday in the New York Times, lacks faith in its institutions: “The country is anxious, pessimistic, ashamed, helpless and defensive.” People feel confused. For example, Mr. Brooks adds: “Sixty-three percent of Americans oppose raising the debt ceiling; similar majorities oppose measures to make that sort of thing necessary.” It could be that the Administration, Congress and the Fed decided they had little to lose in asking Mr. Bernanke to try his hand at instilling confidence. If that is the case, the Chairman has his work cut out.
The recession ended two years ago, according to the National Bureau of Economic Research (NBER,) with the second quarter of 2009. Thus we are in the 8th quarter of recovery; yet, apart from the fourth quarter of 2009, GDP growth has been feeble. Unemployment, while improving recently, remains high at 8.8%. In the past year, the dollar has declined 15%, while rising energy prices and food inflation have hurt the poorest of our citizens.
There are questions that should be asked at the press conference: If the Fed’s mandate is to provide stable prices and full employment, how do you explain today’s asset inflation and high unemployment numbers? With gasoline prices up thirty percent in the last year and with food prices rising, why do you ignore their potential inflationary impact? As James Grant pointed out in his most recent newsletter, “QE1 failed to deliver vibrant growth or full employment” and since QE2 was implemented, stocks and commodities have risen, the dollar has declined; Treasury bond yields are higher and economic growth has been anemic. Will there be a QE3 and what will its purpose be? Can you remove the training wheels from the bicycle (ending QE2) without the vehicle wobbling? Why have you let banks that were too big to fail in 2008 become bigger? Why are the banks that benefitted from tax payers’ bailouts not encouraged, through tax incentives, to lend more aggressively to small businesses and start-ups, instead of to private equity or for M&A, activities that are often job killers, not job creators? How do you justify keeping short rates so low that seniors are suffering, leaving them with two unattractive choices: eating into their capital or speculating in the equity markets?
The Federal Reserve is two years shy of celebrating its 100th birthday. It was created in 1913; the impetus was the panic of 1907. Its responsibilities have expanded over the years. Its main duties today are to promote sustainable economic growth, maintain full employment and provide stable prices – goals that can be at odds with one another.
What we experienced in 2007-2009 was a balance sheet recession – too much debt, too freely offered, spent inflating house prices. In the aftermath of the credit collapse, households and non-financial businesses, deprived of liquidity, adjusted their habits, increasing savings and reducing spending. Government, of necessity (at least initially,) did the opposite, increasing both borrowings and spending. We have reached a point where the Fed must consider reverse engineering what they have wrought, but doing it in such a way so as not to catapult us back into recession. Otherwise, the cure risks becoming worse than the disease.
The Fed’s press conference offers the opportunity to bring more openness to what is an institution shrouded in mystery. My concerns, though, are two-fold: The Street may misinterpret his words and second, the time horizon of investors is short, while the policy needs of the country demand perspective, patience and longer time frames. Despite the series of questions I raised earlier, I worry: will Mr. Bernanke, in opening himself to the clutches of the press, fall victim to the peripatetic nature of its reporters, or will he be able to hold his ground?
Labels: TOTD
posted by Thought of the Day @ 4:37 AM
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