Market watchers have always paid close attention to anything that comes out of a Fed meeting, but that is especially so right now. Even days like yesterday, when nobody expected a change. need to be closely watched. There were no surprises on the rate front yesterday, nor really on any other, yet we still learned a lot, both from what was said and the market’s reaction to it.
Yellen et al’s every utterance is watched more closely now than in days gone by for one simple reason: the Fed is bigger and more influential than ever.
In 2008, faced with the deepest recession since the 1930s, then Chair Ben Bernanke started down a path that would fundamentally change the nature of the Fed. That was the policy known as quantitative easing, or QE. What started as an emergency measure was extended repeatedly with the launch of QE2 and then 3. As a result, the Fed’s balance sheet grew bigger by a wide margin. In other words, the central bank accumulated a massive portfolio of bonds and mortgage backed securities that it doesn’t want.
There have undoubtedly been disadvantages to that. Most notably we have been in a sustained period of distortion of markets. The policy has effectively handed big wads of cash to banks and other financial institutions as the Fed bought bonds and created the money to do so by simply registering a credit in the accounts of the sellers. That cash has been deployed, but maybe not entirely as intended. The idea was that banks would lend out the money and spur rapid growth.
However, a combination of low interest rates that the policy caused and a gun-shy attitude left behind from the near-death experiences of many Wall Street firms resulted in those banks looking for a return from assets, rather than traditional business operations. They went out and bought stocks, both here and abroad, driving stock markets to record highs, and bonds, keeping interest rates at record lows. That has been going on so long that the pricing of assets has in many cases become disconnected from their real market value, or at least could have been. The real problem is that, while we may suspect that has happened, we cannot know for sure. Everything, from baseline benchmarks like Treasuries to alternative assets such as bitcoin, has been affected, leaving us without a norm to compare current pricing to.
Problems aside, though, it is hard to argue with the results. The emergency measure was extended in the face of a Congress that, far from doing what was needed to promote recovery, seemed obsessed with internal squabbling and quite prepared to sabotage it, even going so far as to threaten the full faith and credit of the U.S. and shut down the government at a time when that recovery looked vulnerable. Despite all that, though, the problem that the Fed faces now is, according to most reports, that it has done its job too well. If you had told me six or seven years ago that steady growth, near full employment, and low inflation would be regarded as a problem I would have LOL’d, ROFL’d, maybe even LMAO’d.
Yet that is where we are now. The “problem” that people were talking about going into yesterday’s decision was that, despite a near complete recovery in the jobs market, inflation remains low, hovering around the two percent market. Maybe I am missing something here, but I thought that the Fed’s “dual mandate” obligated it to pursue two theoretically opposite goals, full employment and price stability. They have, in a remarkable feat of policy-making, achieved both simultaneously. The desire to paint that as a problem says more about the whiners than it does about the policy makers.
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