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The obsession with the Fed

It could be that the obsession with the Fed as arbiter of economic policy is rooted in the human desire for a simple source of economic authority.   Especially at a time when government fiscal policy is an ongoing disaster with no hope of correction in sight.   People want to believe the economy is understood by calm people in authority.

That said the Fed clearly has an asymmetric ability to impact the economy.  There is little doubt the Fed has tools to quickly snuff  out the economy (e.g. sharp increase in reserve requirements, huge jump in FFR) but no direct tools to boost the economy rapidly (see 2008-present).   Could monetary policy have worked?  A pure monetarist like Miles Kimball ("Supply Side Liberal" is his blog, at CU now, was at UMICH) argues yes if negative interest rates were implemented then monetary policy would have worked more effectively.

The data supports that equity markets respond to projected changes in Fed policy, at least at the knee jerk reaction level, but it's hard to make a compelling case that Fed easing is visible in non-equity financial data.

In the end the obsession with the Fed does not appear to be based on data but on a desire to think there is an adult in charge.

John, nice comment. I think that’s about right. The Fed is an easy release valve since they’re independent of the legislative process that often bogs down the wheels of change.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Europe's systemic and institutional issues notwithstanding, has negative interest rates worked well there? It seems like they have far more dependence on bank lending, where the US has far more corporate issuance to finance business activities... So maybe that makes negative rates less effective there?

I guess I'm curious why you think negative interest rates might have worked out differently in the US? Going past zero always seemed like pushing on string to me since it doesn't really help creditworthy borrowers decide to borrow (outside of refinancing). If anything it signals how weak the outlook is, rather than accelerating a virtuous money (credit) creation cycle.

Put the fed in charge of payroll taxes... and you give them a much stronger lever to pull.

Why 13 speeches in 1 week?

The FED has proven that more transparency leads to lower realized vol.  They can say things like “auto-pilot”, “ready to act”, or “What ever it takes” in lieu of actual policy moves.

As Paulson said, just because you have a bazooka it doesn’t mean you need to use it.   The Fed has gotten themselves into the business of flashing their bazooka (when ever there is a hint of market turmoil) in order to suppress volatility.   Lower realized vol leads to lower implied vol, lower credit spreads, and higher asset prices.   They have succeeded brilliantly on all fronts.

Jawboning the market with their vague commentary gives them lots of optionality when managing this unprecedented financial and psychological experiment.

If you are sick of listening to the Fed talking all the time, you might want to invest in some earplugs.

That’s an interesting assertion. What evidence do you have that makes you think that the stock market is less volatile because of the Fed?

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche