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A “More Transparent Fed” Isn’t Working…

I haven’t really opined on the Fed in years mainly because, well, say what you want, Ben’s policies have worked.

But, I think Bernanke screwed the pooch yesterday.

An interest rate rise, due to healthy economic activity (expansion) is good and all recoveries have featured them. This one is no different. Higher rates spur additional lending which then spurs additional economic activity. For some inescapable reason the Fed now deems that interest rates should not rise. In my opinion this is a mistake. The only possible explanation I can come up with for yesterday inaction is now that Bernanke knows 100% for sure he is leaving, any large policy shift such as reducing stimulus he wishes to leave to his successor.

Construction is improving, employment is improving, the stock market is improving, housing is really improving etc etc the list goes on. Were he a Dr and the economy was a patient, he would be dialing back medication at this point. I am at a loss to explain why he isn’t unless my previous assumption is correct.

Now, does this mean “things are bad”? No and I am not even sure it is bad news for anyone. Other than perhaps perpetuating the inaccurate perception that the economy is teetering or in trouble, another month or two of bond buying is not going to tip the scales either way. In the grand scheme of things stuff like this has been going on since the fall of 2008, does anyone really think another month or two is going to matter? They aren’t.

No, this goes to more perception and credibility. I initially thought “Fed Transparency” was a grand idea when it was announced and now I’ve come full circle on it and think the Fed ought to just keep quiet until it acts. The constant drone of speeches and statements regarding policy only serve to give people false impressions or paint the Fed into a corner where changing their minds on a policy could cause markets to panic. Further, I’d like to see them start tapering and then only tell us they started a month or two after they have so that the market can see the insignificant effects it had. “Too much information” can really be a bad thing especially when it comes to the Fed and the effects its actions could have.

This is especially exacerbated when the information we are talking about is filtered through “Fed speak” and opened to such a massive range of interpretation. Think about it, even though the Fed gave every indication it was going to start the taper yesterday, a large percentage of the market thought they weren’t. I would ask then what is the point of the Fed even saying anything? If the statements by them are not accepted by the market as accurate and their actions in the end cause the volatility we have seen posted announcement, how can we derive there was any benefit from the indication of intent to taper? The answer? There isn’t.

Let’s go back to the Dr scenario above. If you Dr tells give you some medicine ans says “we’ll reduce this when ABC happens” and then you go back to him and ABC happened and he does not take you off the medicine, what is you reaction? You probably panic and definitely will not give as much value to the next prediction he gives you regarding your meds.

“Fed transparency” after the fact is a good thing. It gives us information into what was discussed at the time and why decisions were made. The Fed seems to have lept over that and now is giving us insight into a “prediction of action” prism. Nothing good comes from this. If they predict an action and then do it, big deal, it was what should have happened. If they predict an action and then alter it, it is a big deal and then markets get spooked as they attempt to discern the real reason why as again, the reasoning for it is always filtered through “Fed speak”.

This will be especially true in the next crisis (yes, we will have another one in the future). This will be when the market needs the Fed to be the most concrete in both statements and actions yet, in the midst of a crisis, that is when events move so fast that predicting the “when and what” of action is impossible. In that instance, a wrong prediction or an action aborted by the Fed only serves to increase market panic as then the market derives from it the Fed is “lost” or “does not have a handle on what is happening”. Additionally, it does not matter who is in charge at the Fed. Nobody has a crystal ball and in crisis, predicting the next shoe to drop is impossible so in this regard the Fed is just setting itself up for failure.

Somewhere there is a happy middle but I’ll go on record and say the current Fed “open kimono” thing just isn’t working…..

“Davison” submits:

Fed action is a negative, but the economy is incredibly resilient and will over come this reversal in 30yr mtg rates which dropped to 4.49% yesterday. This shows that the Fed does not see the positive trends in so many economic indicators and that its view of the economy is quite shallow. The Fed is looking only at very broad unemployment indicator and misses the rich detail provided by a somewhat deeper look which shows us that it is Govt which is in decline and the private sector working very well to absorb this.

Higher rates are necessary to permit bank lending and expand the recovery into construction residential and commercial. Construction workers form the lower part of the wage scale and the bulk of unemployment. A dip in rates today will spur some people to buy a home, but the lending will also pull back. Eventually rates will rise on their own and the Fed will relent;

The economy is bigger than government, it just takes longer sometimes with constant Govt manipulation to move forward.