The Mad, Mad World of the Fed: Fear and Loathing

The Fed is under fire. The vitriol being directed at the central bank in general and its chairman in particular is really something to behold. Although the policy course change was well telegraphed, the actual execution of the new process has market participants and observers furious and disgusted. If one had not seen it for one’s self it would have been difficult to imagine the degree of disrepute which has befallen the Fed. Here are some quotes from an article on the depths to which the Fed’s reputation has sunk.

The Fed claims to be pursuing a slow and steady course, but the results are so erratic that everybody is furious and disgusted with the Fed. No one, in fact, seems quite sure of what the Fed is up to, including the Fed itself.

Recently a group of respected economists recommended that the Fed governors all submit their resignations…

The irony is that over the last year and a half the Fed has presided over increasingly wild swings in money-supply growth…at a time when it has been attempting to get a better grip on its procedures. The result instead has been increased volatility and unprecedented gyrations in interest rates. Responding to some of the administration’s concerns the Fed recently modified its operations again. But this has served to sow even more confusion, and Wall Street bond dealers are baffled over what the Fed is doing.

“It’s like a soap opera, except that it’s very important,” commented a leading government-securities dealer. “Trying to determine interest rates has now become a guessing game. It’s like throwing darts at a board.”

There is some speculation that there has been deliberate collusion between the Fed and the Treasury, an indication of the deep suspicion of the Fed that now exists within the financial community. Criticism of the Fed from bond dealers has reached a fever pitch.

Oh, I’m sorry this article is almost thirty years old; it’s not about the current Fed. “The Mad, Mad World of the Fed; Fear and Loathing” was about the changes in the execution of monetary policy instituted by Paul Volcker in the early years of his tenure as chairman. Please excuse the error.

But I do think an interesting feature of the current situation is the dichotomy of opinion amongst the participating members of the policy committee; there has been an unprecedented degree of dissension on the Fed. In the first fifty meetings of his regime the chairman has had dissenting votes at more than half of them. Ten times during that span there were two voters who went against the majority, four times there were three members who voted thumbs down and there were even four dissenters at two of the sessions. This is really an indication that the chairman’s authority is on a razor’s edge and that certainly does not bode well for his…oops. Sorry, once again I am mistaken. I have by accident looked up the early years of the Alan Greenspan chairmanship. Bernanke has also presided over dissenting votes at slightly more than half the meetings during his tenure, but never more than two at any one time. I apologize for any confusion.

One thing that is unusual, I think we can all agree, is for a Fed chairman to go public in a widely read periodical with a detailed explanation of his reasoning behind a particular policy effort. And by this I mean of course the article the chairman published in Fortune magazine to clarify…There I go again, the magazine article was from 1937 when then chairman Mariner Eccles realized his strategy would be somewhat controversial.

Hmmm, the more things change the more they remain the same. There must be something unique about today’s Fed; something that makes this era different… What about the beard? Yes, the beard. Can you name another Fed chairman who sported any facial hair, let alone a beard? I don’t think so. Things really are different this time, don’t you think?