Fed Called Out on Strikes

August 9, 2011

The FOMC proved not to be up to its task.  With European and U.S. leadership having struck out already, the Fed represented the final out and failed to swing at a pitch in the strike zone.  Like the politicians, the Committee couldn’t agree.  A compromise extended the likely period for “exceptionally low interest rates” from a running 4-6 months to about two years.  This is a symbolic gesture only.  Who expects a rate hike within two years with a recession approaching?  It seems not too far-fetched to imagine the fed funds rate not getting raised before mid-2015.  Not to beat a dead horse, but Japan’s key policy rate has not exceeded 0.5% since early September 1995.  In a hypothetical gesture to prove it’s working the case, the Committee said it was regularly reviewing its balance sheet and “prepared to adjust those holdings as appropriate.”

So markets didn’t get QE3 or even QE3-lite.  Neither did the Fed announce anything else really concrete such as cutting to zero the interest rate paid to banks on reserves held at the central bank.  Lest there be any other explanation for the lack of a bone with real meat on it, the statement revealed three dissenters to the modified verbal rate guidance clause, as Minneapolis Fed President Kocherlakota joined the hawkish presidents of the Philly and Dallas Feds to dissent.  The last time Plosser and Fisher were rotating voting members of the Committee was in the infamous year of 2008.  Those two teamed up in March and April to dissent against decisions to ease.  Fisher also dissented unilaterally from easing at a meeting in January 2008 and recommended a rate hike at meetings in June and August, the latter less than six weeks before the bankruptcy of Lehman Brothers.  Apparently there’s no notion of policy crimes that would disqualify a person from voting based on bad judgement in the past.

It was a strike out but not a swinging strike.  The bat never left the FOMC’s shoulder in hopes that good providence in the form of better data, a turn for the better in Europe’s debt crisis, better leadership in Washington, or mercy from the ratings agencies might save the day.  All that’s wishful thinking.  As umpire, judge and jury, the marketplace was in no mood to call the pitch a marginal ball.  The instant reaction predictably was to resume the sale of risky assets like equities and the euro and to buy Treasuries and other hedges against the worst case scenario.  There will be more innings to play, and investors are left to wonder how much pain will be required for the Fed to become more proactively engaged in the crisis.  Apparently, monetary officials will wait to see the personified whites of a recession’s eyes as they belatedly did in January 2000 and September 2007.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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