We attempt to survey the Fed every Qt or so, drawing on old contacts (those still with the living) and some of a fresher variety; the purpose is to measure staffer satisfaction with the Chair, alternative policy ideas, the landscape just ahead, etc. Summarizing our findings today we do for pure relaxation, perfect as Thanksgiving gets underway.
First, there is no question Bernanke is liked by his colleagues; maybe not regarded as the best central banker that ever lived, but, most are fond of him. So are we. He is a fine guy, his candor - a welcome change at that post.
The next consideration is policy agreement. Few staffers we spoke with think present policy will do much good. Most, although they don’t use the phrase, compare it to cheer leading. Most understand that the power-lifting now must be done by Congress, not the central bank.
To review what is presently in place: The Fed is swapping about $45 bln of short-term Treasuries for longer-term debt. The Fed is in addition buying $40 bln a month in mortgage-backed securities. Finally, when “twist” expires the end of December, it is very likely the FOMC will begin outright purchases of about $45 bln.
Most staffers we talked to admit “twist” amounts to little more than a change in the makeup of the Fed’s portfolio. Next, most staffers we talked to think it will make little difference to the economy as a whole if the Fed mops up a little mortgage debt. Most feel that Bernanke is making what amounts to fiscal policy in desperation that Washington will not. But too, they figure none of this can hurt.
Beg to differ.
Interventionism is corrosive at a central bank (unless in time of crisis – ’08). We know from the painstaking work of Friedman, Schwartz, Taylor and others that only rule-based central banking delivers prosperity. We saw this in play in the 80’ and early 90’s. A dual mandate is also corrosive because it invites political tinkering, and, it is a redundancy - stable prices create full employment. Planners in central banking will be no more successful than planners in government.
So we have a Fed which is printing a ton of money, the majority of which goes right into “excess reserves” because these pay 0.25%. Equity types do ok – temporarily - and seniors get busted. That’s about it. (Most staffers figure Bernanke will keep at it, but will switch to an economic goal as a target and eliminate the commitment to a calendar date.)
Next, “twist” has kicked up the rates in the repo market - the fueling place for funding new consumer and corporate loans, and for REIT’s. Thus “twist” provides a hindrance to this activity.
Excavation of faulty logic at the Fed is part of our job, but translation is the other. This is where a handle on crowd behavior comes in useful.
Recall that little bit of fun at trading Fed policy, when on Sep/14 we advised that readers (and instructed clients) to sell the US term structure. This of course was to take advantage of the crowd frenzy following the announcement of QEIII; 5-10, then 116, 2-30, 285. These were taken in Sep/27 at 100 and 254.
Yet these opportunities have come along all too infrequently; years past, with FI price change in a higher gear tied to Fed intent, they were plentiful. Nowadays we have to be satisfied with ambushing a straggler or two from time to time.
Robert Craven
First, there is no question Bernanke is liked by his colleagues; maybe not regarded as the best central banker that ever lived, but, most are fond of him. So are we. He is a fine guy, his candor - a welcome change at that post.
The next consideration is policy agreement. Few staffers we spoke with think present policy will do much good. Most, although they don’t use the phrase, compare it to cheer leading. Most understand that the power-lifting now must be done by Congress, not the central bank.
To review what is presently in place: The Fed is swapping about $45 bln of short-term Treasuries for longer-term debt. The Fed is in addition buying $40 bln a month in mortgage-backed securities. Finally, when “twist” expires the end of December, it is very likely the FOMC will begin outright purchases of about $45 bln.
Most staffers we talked to admit “twist” amounts to little more than a change in the makeup of the Fed’s portfolio. Next, most staffers we talked to think it will make little difference to the economy as a whole if the Fed mops up a little mortgage debt. Most feel that Bernanke is making what amounts to fiscal policy in desperation that Washington will not. But too, they figure none of this can hurt.
Beg to differ.
Interventionism is corrosive at a central bank (unless in time of crisis – ’08). We know from the painstaking work of Friedman, Schwartz, Taylor and others that only rule-based central banking delivers prosperity. We saw this in play in the 80’ and early 90’s. A dual mandate is also corrosive because it invites political tinkering, and, it is a redundancy - stable prices create full employment. Planners in central banking will be no more successful than planners in government.
So we have a Fed which is printing a ton of money, the majority of which goes right into “excess reserves” because these pay 0.25%. Equity types do ok – temporarily - and seniors get busted. That’s about it. (Most staffers figure Bernanke will keep at it, but will switch to an economic goal as a target and eliminate the commitment to a calendar date.)
Next, “twist” has kicked up the rates in the repo market - the fueling place for funding new consumer and corporate loans, and for REIT’s. Thus “twist” provides a hindrance to this activity.
Excavation of faulty logic at the Fed is part of our job, but translation is the other. This is where a handle on crowd behavior comes in useful.
Recall that little bit of fun at trading Fed policy, when on Sep/14 we advised that readers (and instructed clients) to sell the US term structure. This of course was to take advantage of the crowd frenzy following the announcement of QEIII; 5-10, then 116, 2-30, 285. These were taken in Sep/27 at 100 and 254.
Yet these opportunities have come along all too infrequently; years past, with FI price change in a higher gear tied to Fed intent, they were plentiful. Nowadays we have to be satisfied with ambushing a straggler or two from time to time.
Robert Craven
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