I’m sure you’re familiar with someone who thinks they’re a Big Deal. Your boss, that weird cousin on Facebook, your toddler. No corner of society is immune from a puffed-up sense of self, and you know the government is no exception.
The Fed wants us to believe that its every move – every press conference, every meeting, and every quote in the papers – is a Big Deal. It really does take itself quite so seriously, but its recent history shows we don’t have to take it all that seriously.
Remember, the Fed promised four rate hikes last year and only delivered once, but with the amount of ink spilled on their press conferences and coffee orders (only sort of joking) you’d think they tried to create a whole new U.S. economy.
This year, it’s promised three rate hikes and according to its statement after the conclusion of this year’s first meeting, nothing has changed.
The Fed stated that job gains remained solid while the unemployment rate remained low. That’s fine, but wages and other measures of compensation are still low. Inflation is still below their 2% long-term objective and their measure of inflation expectations remain unchanged.
But they did note that consumer and business expectations have improved.
It’s a wonder, to me at least, why the Fed bothers with a policy meeting every six weeks since guidance and policy is unlikely to change that often. Its view of the economy is so macro, there’s really only so much it can do to affect the day-to-day lives of Americans. It seems it wants to hold these meetings just to stay relevant.
Former Minneapolis Fed president Narayana Kocherlakota went hard on the Fed recently. He accused them of holding “zombie meetings” – meetings that don’t include a live statement or press conference.
In other words, the four meetings per year where the Fed chair gives her live statement and presser are considered “live” meetings with a possible policy change (and thus are actually useful to the public and worth our time) while the other four are viewed as “dead.”
Congress only requires the Fed to hold four meetings per year and it probably wouldn’t need to make major policy changes more often than that. But for now, the Fed wants to be transparent and visible so, in addition to the eight policy meetings, statements (live and written), and four press conferences, we also get countless Fed speeches along with Senate and House testimony from the Chair.
That’s a lot of talk and maybe why the Fed has lost a lot of credibility over the last few years. Why say something if you’ve got nothing to say?
The next meeting in March will be a “live” meeting but the market hasn’t fully priced in another hike until the June “live” meeting.
And that really gets to the meat of the issue, as I see it.
The market does the talking for the Fed, particularly of late. So far, big-picture economic data has been mixed and concerns about lack of inflation and wage growth remains.
Right now, the markets are more concerned with what government policy will be going forward and not too much with what Fed policy will be.
So, for now, forget about zombie meetings and live meetings and get your popcorn. The entertainment will start when Fed Chair Janet Yellen testifies before Congress next week. She’ll be defending failed policies, the Fed’s independence, and her job!
Yellen seems to be secure, for now, since her Chair appointment isn’t up until next year (along with the Vice-Chair). President Trump will certainly fill the two vacant Board of Governors seats in the near term. So, we may get a better feel for Yellen’s standing with the new administration during next week’s hearings.
I’m pretty sure we’ll just see more political grand-standing (like we haven’t had enough of that!), like any other Congressional hearing. But it would be nice if Congress rolled back the “dual mandate.” That’s the Fed’s responsibility to promote maximum employment and stable prices. I would suggest that they just focus on regulating their member banks and making sure they have the ability to lend to qualified borrowers. A classic “keep it simple, stupid” situation.
Let’s face it, the federal government has more influence on employment through tax and regulatory policy than the Fed could ever have with their monetary toolbox.
Today, instead of being overly concerned about future Fed action, the markets seem more focused on the new administrations fiscal policies. The markets are still convinced they need stimulation but more so in the way of government spending and less regulations.
Stock markets shot to new highs after the financial crisis of 2008 because of enormous Fed stimulus, but our economy barely grew, corporate profits were stunted, and wages are still stagnant… nine years later!
Since Trump was elected, stocks again moved higher on the bet that he will spend on infrastructure, cut taxes and regulations.
But, it’s just like the failed monetary policy experiments from the Fed. The government can’t change demographics. We are getting older, spending less and stimulus is just a short-term waste of taxpayer money that won’t have a lasting effect on our economy.
Over the last couple weeks, the markets have been quiet. It could be complacency but my bet is that it’s the calm before the storm.
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Editor, Treasury Profits Accelerator