It’s been a boring few weeks around here lately. No fishing, no jumping out of planes, no mountain biking, no travelling…it was all rainy days and sick kids until Saturday. What changed on Saturday? Last week I got an invitation to go to the Bob Seger concert at the FedEx Forum here in Memphis…and these were front row seats. I immediately jumped on the invite and began counting the days until the show.
The first thing you notice at a Bob Seger concert is that Bob Seger has gotten really, really old. His hair is gray and he’s wearing orthopedic shoes, and the stage is padded/carpeted and you start to feel a little sorry for the guy when he walks out. The average age of the band looks to be about 100. The second thing you notice is that these guys absolutely rock. Halfway through the second song I turned to my wife and told her I hope I’m half as cool as Bob Seger when I get to be his age. She assured me I’m already that cool but I think she was just saying it so she wouldn’t have to walk home. It was an awesome event…many times you could hear the entire stadium singing along over the volume of the band. Everyone was on board and rocking in the same direction. This was a really strong performance for a guy whose first album came out the year I was born.
What does this have to do with monetary policy?
The first thing that comes to mind is that the Fed, like the members of Bob Segers band, is almost 100 years old. The Federal Reserve System was founded in 1913…the same year the Post Office began parcel deliveries…which might be an ominous parallel.
The second thing that comes to mind is that not everything ages well. Bob Seger is going to rock all the way to the grave…he will be as relevant the day he dies as the day he released his first album. The Fed, however, may not have what it takes to remain as relevant.
In fairness, the Fed has a much more difficult operating environment than Seger does. In the old “US Centric” model the Fed had a lot of leverage and could exert significant control over the system with the traditional tools they had available (Open Market Operations, Reserve Requirements and the Discount Rate). Nowadays we have a global economy, with many developed economies working to maximize their positions versus the rest of the world. Hundreds of economies and currencies, many with powerful central banks, are all working day and night to advance their own positions on the global stage. Capital can flow into and out of most countries almost instantaneously, and the exchange rate of that capital is also fluctuating in real time. This is the world in which the Fed must now operate. It is a far cry from the environment that spawned them in 1913. In 1913 most people didn’t own cars...there had never been a phone call from the west coast to the east coast…and I find it interesting to note that prior to 1913 there was no personal income tax in the United States…my what a different world that must have been. Nowadays most families have at least two cars, everyone over the age of 8 has a phone, and I don’t even want to start talking about income taxes.
Many of the tools the Fed has used for the past 100 years are no longer as powerful as they once were. Years ago in the old US-Centric model the Fed may have been able to create a significant economic impact with a 50 basis point cut in the overnight rate. Now with a high-tech and fast-paced global economy we are down to zero percent on Fed Funds…and it’s still not enough. The Fed can’t get the traction they desire so they come out with various Quantitative Easing programs in an attempt to get additional leverage on the problem. Those measures have also come up short. We are now four years into this economic downturn, the fed has ballooned its balance sheet, taken the overnight rate to zero, unemployment is still hovering near 9% with many arguing that “structural” unemployment is taking hold, and just this week they reiterated their pledge to leave rates at zero through mid-2013.
Despite all of the Feds actions the economy is still in the dumps. They simply can’t jump start things the way they used to. As we enter 2012 I think it’s helpful to take a good hard look at where we are, and what we should realistically expect from the Fed over the next 12 months.
I wouldn’t count on the Fed riding to the rescue of the economy in 2012. It is readily apparent that they don’t have a magic bullet for the issues that confront us…but it will be helpful to know what their plans are none-the-less.
What can you count on?
If you can bank on one thing it’s the Feds statements. They have gone to great lengths to improve communication with regard to policy. When they’ve told us they were going to do something…they have done it. So while their monetary policy tools may not be as effective as they used to be…they at least have a solid track record of following through on their statements.
The first thing to recall is that their baseline forecast is for the overnight rate to remain at zero percent through mid-2013. If you are still holding your breath in Fed Funds hoping for a rapid rise in the overnight rate it looks like you’re might pass out before that day comes. We have an analysis that shows “the cost of waiting” to help people determine if they are better off staying in Fed Funds or investing given their outlook on rates. If you’d like to see this report just shoot me an e-mail and we can run the report. This report will show you the difference in income between your Fed Funds projection and any investment you’d like to use as a comparison.
The second big item is that they remain committed to reinvesting cash flows from their securities portfolio to fund the purchase of longer maturity Mortgage Backed Securities. The goal here is to help the housing market by keeping downward pressure on mortgage rates.
As we enter 2012 these seem to be the “constants” that we are getting from the Fed and I would certainly build them into my thinking for 2012.
So these are just some random thoughts on the Fed, their past, and our future.
Now every time I read an FOMC statement I think of their 1913 start date and I look at all they’ve done right up until yesterday…and my focus fades from the words leaving Bernanke’s mouth at the press conference…and I start to hear Bob Seger singing softly in the background…
The years rolled slowly past
And I found myself alone
Surrounded by strangers I thought were my friends
I found myself further and further from my home
And I guess I lost my way
There were oh so many roads
I was living to run and running to live
Never worried about paying or even how much I owed
Moving eight miles a minute for months at a time
Breaking all of the rules that would bend
I began to find myself searching
Searching for shelter again and again
Against the wind
A little something against the wind
I found myself seeking shelter against the wind
If you have any questions or if there is anything I can be doing for you just let me know.
Steve Scaramastro, SVP
800-311-0707
Posts
No comments:
Post a Comment