Time for a Rate Hike? Or Just the Fed’s Historic Game of Smoke and Mirrors?
Since its creation in 1913, the Federal Reserve has been endowed with abundant power. This was an understandable move by Congress at that time since our central bank was created largely in response to banking panics, thus as a means of preventing future havoc. Congress’s three principal objectives for the Fed, as it came to be called, were to maximize employment, stabilize prices and moderate long-term interest rates.
You could make a very strong case that, in creating the Fed, Congress made a monster that will haunt it for the rest of its days. Fed policy decisions are not subject to presidential, congressional or judicial approval. Our central bank isn’t funded by Congress; and the terms of its Boards of Governors overlap presidential and congressional terms.
But power always comes at a price; and since its inception, the Fed has been a frequent target of criticism. In 1921, Senator Robert Latham Owen accused it of trying to influence German inflation. Congressman Louis T. McFadden, Chairman of the House Committee on Banking and Currency from 1920 to 1931, actually claimed the Fed deliberately tried to cause the Great Depression. And during at least one of his terms in office, Texas representative Ron Paul regularly introduced bills to abolish the Federal Reserve.
Although a strong, distinguished background in economics is the obvious requirement for becoming a Fed Chair, an acute ability to finesse Congress and the public sure helps. Alan Greenspan’s remark about “irrational exuberance” in his speech before the American Enterprise Institute is, of course, the stuff of legend.
More recently, in her February 16 testimony before Congress, current Fed Chair Janet Yellen skated very carefully over the sensitive issue of black unemployment when Georgia Democratic congressman David Scott put her feet to the fire. When Scott commented to Yellen, “Nobody is suffering from unemployment like the African American community,” and urged her to put the issue on “the front burner,” Yellen casually replied the black unemployment rate is not a metric the Fed takes into account when deciding whether to raise rates.
In responding to the Congressman Scott, Yellen used the loaded word “metric,” a traditional Fed standby. Fed Chairs and Boards of Governors have been citing statistics and so-called metrics since the Fed was created in 1913. They’d have us believe they’ve got all the numbers down pat when it comes to inflation and deflation, and they know exactly when to flip the switch on a rate raise or decline.
If you’re one of the lucky members of Congress who gets to grill the Fed Chair when she testifies, and you’ve got the cheek to ask about an aspect of the economy for which there’s no metric, expect to be summarily dismissed.
Oh – and if you dare challenge the numbers, the Fed has an answer for you too. Of course the Fed Chair and the Board of Governors will consider information that’s not readily quantifiable – but only when they say it’s appropriate to do so.
Say hello to the Fed’s Beige Book! This is a periodic collection of anecdotal information from each Federal Reserve branch bank, consisting of bank director interviews with local business people, economists and market experts. The Beige Book didn’t become publicly available until 1985 when a Dow Jones reporter asked to see it.
In case you’re wondering what kind of anecdotal information appears in The Beige Book, you’ll be interested in knowing about the edition issued on June 1, 2016, that included a report by the San Francisco district documenting stepped-up searches for storefront properties by cannabis retailers. Call it the marijuana metric…
The same Beige Book documents a conversation in which a Philadelphia contact talks about economic conditions that are “disappointingly stable.” This is polite parlance for stagnant or, if you prefer, dead in the water. A stable economy is one that doesn’t grow – hardly a condition which, if it existed nationwide, could justify a rate increase.
The Fed continues to be more ceremonial than transparent in its congressional testimony and its public discussions. This is especially frustrating for businesses looking to make long-term plans.
And for private investors planning for retirement, and looking to second-guess what will happen to the dollar and to equity markets, it can prove a nightmare. The last thing you and I need is a central bank that uses mysterious metrics and Beige Books to play Texas hold ’em with our nest eggs. Could there be a more pressing reason right now to invest in physical gold?