This post is about the Fed’s latest effort to build confidence in the financial system by “providing the predictions of its senior officials about their own decision, hoping to increase its influence over economic activity by guiding investor expectations.” (http://www.nytimes.com/2012/01/04/business/economy/fed-to-start-publicly-forecasting-its-rate-actions.html?_r=1&ref=business)
“The inaugural forecast will show the range of predictions made by Fed officials about the level of short-term interest rates in the fourth quarter of 2012, 2013, and 2014…. It will also summarize when they expect to start raising short-term rates….”
To me, this is Ben Bernanke’s latest effort to justify himself and what he has done. It is Mr. Bernanke’s cry to financial markets: “please understand me.”
But, the more Mr. Bernanke cries for understanding, the more he digs a hole for himself with respect to the future. For one, who can believe that anyone can forecast short-term interest rates for a three-month period let alone for a three-year time frame? The record of the people at the Fed is no better than that any other group of forecasters.
Second, by telegraphing the Fed’s intention, the Fed will be setting itself up for financial markets to “bet” against it. This is always a possibility when central banks or governments explicitly state their policy goals. And, the “bet” many times can become a “sure thing.” Perhaps the best, most recent example of this is the Soros “bet” against the British government in the 1990s about the value of the pound.
Ultimately, to me, this effort at “transparency” is a sign of Mr. Bernanke’s real lack of self-confidence in his ability to lead the Federal Reserve through this difficult time. He can’t understand why people don’t understand what he is doing and so he tries, harder and harder, to create this understanding. His steps to gain greater “transparency” over the past six months is just evidence of his struggle.
I will admit that I am not, nor have I ever been, a fan of Ben Bernanke as the Chairman of the Board of Governors of the Federal Reserve System. I was in favor of him being the Chair of the Economics Department at Princeton University…but not Chair of he Fed.
I was against Bernanke’s re-appointment as the Chairman (http://seekingalpha.com/article/151474-exit-strategy-an-argument-against-bernanke-s-reappointment) and disappointed in President Obama for actually re-appointing him (http://seekingalpha.com/article/158762-bernanke-s-disappointing-reappointment).
In reviewing Bernanke’s record since being a member of the Board of Governors, I see nothing but a competent academic, out of his element and over-his-head in the deep water of a twenty-first century whirlpool.
In more peaceful times when he was just a member of the Board of Governors (August 5, 2002 – June 21, 2005) he was a lackey of the then Fed Chairman Alan Greenspan, developing the argument for Greenspan’s defense of recent monetary policy that used the savings of China and the Middle East to finance U. S. Treasury debt.
He was a strong supporter of Greenspan’s effort to keep the Federal Funds rate at one percent in the 2003-2004 period to combat the possibility of the economy going into a deep recession. This effort helped to underwrite the “bubble” that took place at this time in the U. S. housing market.
Then, once he was became Chairman of the Federal Reserve on February 1, 2006, he was a firm advocate of pushing the target rate for the Federal Funds rate to 5.25 percent and keeping it there into August of 2007 so as to combat the possibility that inflation might get out-of-hand.
The Fed move was in response to the financial market meltdown of “Quant” financial firms that took place in August 2007. (See book review on “The Quants”, http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.)
The recession in the United States began in December 2007.
The next episode of Bernanke’s “steady hand on the tiller” came in the fall of 2008. I have characterized Bernanke’s reaction to the Lehman Brothers failure as one of panic. (See my post “The Bailout Plan: Did Bernanke Panic”, http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic.)
But, what Bernanke and the Fed did next has been the basis for the claim that Mr. Bernanke saved the United States from a second Great Depression. The Federal Reserve acted to increase its balance sheet from slightly less than $900 billion is assets to more that $2.0 trillion in assets by the beginning of 2009. Through various stages of Quantitative Easing (QE), the Fed’s total assets now amount to more than $2.8 trillion.
This injection of funds into the banking system has resulted in around $1.6 trillion in excess reserves on the balance sheets of U. S. banks. It has created little in the way of bank lending or economic growth.
However, many people have given credit to Mr. Bernanke for saving the country and this may be an appropriate gesture on the part of a grateful country. My concern has been that this policy is nothing more than a policy of throwing sufficient “stuff” against the wall to see what would stick. As a consequence, monetary policy in the United States has become a tool of ignorance, not of professional competence.
And, that is exactly where we are today. That is why there is so little confidence in the Chairman of the Federal Reserve System in world financial markets.
Thus, that is why the Chairman of the Federal Reserve System is struggling to reach out to the financial markets to justify what he has done…and is doing.
This effort, in my mind, will achieve little or nothing…and could do much harm.
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