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The forgotten Fed


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The forgotten Fed

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

At my age, I'd love it if things could just slow down a bit. You know, if I didn't pick up my iPad or turn on the news every morning and have to suddenly adjust to some new reality that did not exist the day before. For instance, I had just gotten used to life according to the New Normal (as defined by Professor Mohamed El-Erian), which was the theory that the American economy would experience slow GDP growth and ultra-low interest rates as far as we could see. And then — WHAM! — along comes the election, and seemingly overnight everything has changed. While Mr. El-Erian has not yet renamed this new era the Newest New Normal (I'll do it for him), it seems that we are now facing a whole different set of expectations and possible outcomes. For folks like me — those who are on the bumpy glide path to retirement — this can be an especially anxiety-provoking prospect.

If President-elect Trump's pronouncements are to be believed (the ones from the last few days, anyway — I lose track) we're now looking at an economy that can grow in excess of 3.5% to 4% per year, one where manufacturing jobs will come back to the Rust Belt, where tech companies like Apple will source parts made in the U.S., where both personal and corporate tax rates will come down (bigly), and where everything will be fantastic and great again. Hyperbole aside — and there is tons of it — it is nevertheless clear that there will be massive changes in the way that corporate America is regarded by the new administration and that those changes will be aimed at restoring the primacy of the private sector for the capital markets.

I was startled to see this headline in the Dec. 13 Financial Times: "Auther's Note: Forgetting the Fed." In the article, FT senior columnist, John Authers, examined the problems with the Fed's predictive abilities (especially the issues with the errant "dot plot") over the last few years and called into question how the Fed will guide expectations in the months ahead, particularly given the more — uh, muscular — communicative skills of the incoming president, who has been a Fed critic in the past. Another opinion piece — "At Long Last, the Fed Faces Reality", in the Dec. 14 edition of The Wall Street Journal — echoed the prevailing sentiment that the Fed has long been behind the curve and is now struggling to come to grips with the new reality of a Washington dominated by pro-growth and anti-regulatory forces.

It struck me as I was reading these pieces — and there have been many others in the same vein — that both America's citizens and its capital markets are going to have to undergo a huge reordering of the way that we think about the primacy of the Fed in our everyday economic and investing lives. I am old enough to remember a time — probably pre-Volcker, as I think about it — when the Federal Reserve operated very much behind the scenes and the much of the general public was scarcely aware of who the chairman of the Federal Reserve even was, much less of what he (and it was always “he”) even did.

That quiet anonymity began to change with the assumption of the Fed chairmanship by Paul Volcker and then even more with the tenure of his successor, Alan Greenspan. I always got the sense that Mr. Volcker was not particularly comfortable with the celebrity status that he was afforded — not only because he was an imposing 6 feet, 7 inches tall, but more because he single-handedly broke the back of the late 1970s stagflation — and really preferred to work behind the scenes. Not so with his successor. I always thought that Alan Greenspan loved (and craved) the spotlight, and one can argue that his over-long tenure of 19 years at the helm of the Fed is one that should not be repeated. And poor Ben Bernanke — who arguably really got the short end of the stick in his chairmanship — almost certainly did not foresee the reasons that he would be in the news daily, and could not have anticipated that he would be in the eye of the critical storm almost from the beginning.

In the eight years since the Financial Crisis, it seems that the Fed has been with us on almost a daily basis, and that we have — unwisely and unhealthily — come to depend upon it as the indispensable cog in the American economic wheel. Perhaps that dependence has come about of necessity, given that the ability of Congress to do much in the way of fiscal stimulus in the last eight years has been just about zilch (not assigning blame here, just stating the obvious) and that the Obama administration has seemed perfectly happy with this Fed-centric state of affairs.

But I would also hazard my own opinion that there have been those on the Board of Governors who like it this way, and will be loath to cede responsibility for the economy back to our elected officials. These last eight years have, after all, seen the celebrity factor for financial pundits and money managers — like Paul Krugman, Alan Blinder, George Soros, Bill Gross, Simon Johnson, and on and on — increase exponentially, and it seems that some on the Fed Board and at the regional Fed banks have come to see themselves as part of that chattering class. Here's an interesting question — who'll be at Davos next year? And who will start keeping their mouths shut in the interim?

If Janet Yellen's remarks at her most recent press conference are any indication, there is a rough period of adjustment ahead, for all the parties involved. While the Fed delivered the long-anticipated 25 bps increase — and I just can't wait to go out and spend my extra earnings on my savings — I still got the sense that the Fed Board does not yet fully appreciate the impact of the post that has just whacked it upside its large and unwieldy head. While Mrs. Yellen said that she foresaw three rate moves in 2017 — versus the two that the “dot plot” had implied — her commentary was at times somewhat churlish and indicated to me that she still does not fully understand the weight of the forces that got Donald Trump elected to begin with.

The FT (Authers, once again, in a Dec. 14 piece titled "Yellen's discordant note") went through the parts of her news conference that did not square with the new reality of the Fed's situation, and I heartily recommend a reading of this article. The part of Mrs. Yellen's commentary that struck me as being the most off-base was her batting away of the impact of possible new fiscal stimulus, saying instead that it was not needed at a time of full employment and would have been more valuable several years ago. Full employment, with as many as 95 million workers on the sidelines? Really?

Authers cited someone from the blog site ZeroHedge who captured my reaction to Mrs. Yellen's commentary almost exactly: “While the Fed was begging the government to step in with fiscal stimulus for year upon years, now that the U.S. has an unprecedented amount of fast food workers and minimum wage employees who are benefiting from recent minimum wage hikes, this is no longer the case.” Perhaps it is time for Mrs. Yellen and the gang to go back into that big marble room, shut the door and think about what the 8%-plus rise in the Dow since Donald Trump's election really means.

Time not to lead or to follow, but simply to get out of the way. If that lesson does not soon get through, I suspect that the ascension of some new faces at 20th Street and Constitution Avenue, N.W. — like that of John Allison, my own personal favorite — will be bringing it home, up close and personal.