A few nights ago the wife and I were synching our schedules for the rest of the week and I mentioned to her that I had a dinner meeting Thursday evening. She glanced my direction and asked “oh, is this the thing with your little nerd group?” The Economic Club of Memphis…yes…my “little nerd group”. Its times like these that I really understand how Rodney Dangerfield must have felt. She’s a bean counter anyway so I don’t know where she thinks she has a lot of room to be calling me a nerd.
So last night I had dinner with the Memphis Economic Club. The guest speaker was James Bullard, President of the St. Louis Federal Reserve Bank (voting member). The prepared notes to the meeting were fairly bland and best summed up by a friend of mine when he said the speech could be divided into three parts:
1 – The history of the Fed
2 – The “It’s not our fault” section
3 – The “We need more oversight powers to keep this from happening again” section
The main presentation seemed to be a PR campaign to educate people on where the Fed came from, how they do what they do, and how they helped rather than hurt the economy as we moved through this crisis. One surprising fact in the presentation dealt with the extent to which the Fed is audited. By the Feds estimation they undergo roughly 425,000 hours of audit on an annual basis. This includes their internal auditors, Deloitte (their external auditors) and Board of Governors oversight.
If you could ask one question…
The Q&A session, as usual, was far more informative than the main presentation. My question to Bullard was “given the current state of the “recovery”, when, how fast, and how high do you see the Fed raising the overnight rate?” Based on daily conversations with bankers I knew this question was on your minds, so I went with that.
Bullard stated that in his view the market’s perception that the Fed Funds rate is going up later this year is “over blown”. He goes on to state that they have two instruments on the table...the short term rate and quantitative easing, which gives them a degree of flexibility when it comes to executing any monetary policy tightening. They could move the short term rate “off zero” or adjust the quantitative easing to get the monetary tightening effect that they are after. His view is that markets get overly focused on interest rates…but they could tighten just as easily through quantitative measures instead.
As is perfectly reasonable he answered all questions against a backdrop where the data drives the decisions. There is no set plan that they will execute in a prearranged order…they have the flexibility to move in any direction they deem appropriate given the tone of the economic data as we move forward.
What’s that on your balance sheet?
Bullard spoke of the Feds 1.25 Trillion dollar position in MBS like it was no big deal. He says that they’ll be done with their purchase program in March, and that they’ll be able to just sell MBS out of that position when they want to. Listening to him speak you’d get the impression that this is no big deal...like there was nothing that could possibly hinder their plans.
He and I don’t see that program, nor it’s unwinding in the same light. In his view they will just unwind it at their discretion. In my view the market has just as big a say in how and when they end as they do.
On Unemployment
Bullard received a question on whether the Unemployment Rate can return to its long term levels around 4%. He stated that he thinks it can return to those levels over time but that it will “not happen very soon.” He expects the Unemployment Rate to tic down but sees no dramatic improvement anytime soon. Bullard also pointed out that while the flexibility of our labor force and structure allows us to generate very low unemployment rates it takes time for this to happen and that it will be a painful and difficult process.
That’s it.
So those are the highlights from dinner with my little nerd group. 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
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