Why do we refuse to call absurdity absurd? Meeting after meeting, news conference after news conference, it becomes increasingly apparent that we have conferred on the Fed Chair the role of economic and securities market orchestrator. Markets typically tip-toe into Fed announcements only to explode into paroxysms of volume as algos move prices violently – often in alternating directions – in the initial moments following each announcement. The ultimate market direction is dictated by the Fed’s dovish or hawkish tone relative to the market’s expectation leading into the meeting. Imagine how much more orderly and intelligent it would be to have a rule-based decision-making formula that investors could monitor as new data unfold.
Because the Fed’s Congressionally-conferred mandate extends beyond currency stabilization to include maximizing employment, Fed members now scan the world for economic, monetary and securities market data, all of which now seem relevant in their decision-making process. In this week’s speech to the Economic Club of New York, Fed Chair Yellen relied heavily on global uncertainties as rationale for large doses of caution in considering future interest rate increases.
The Fed’s long history is replete with flawed judgments and policy moves. For years, forecasts of the current Fed have been far off the mark on economic growth and interest rates. Off past performance, why would we expect this group of academics and regulators to have greater insight into domestic and world economic prospects than the broad universe of business people and investors? It flies in the face of all logic to allow Chair Yellen and any small band of academics and regulators to wield the power that the Fed holds over domestic and world economies and markets. Congress must take that giant club out of the Fed’s hands by reducing its mandate.
Since the general public and its representatives in Congress don’t understand this highly complex policy-making process, they vest power in a perceived wise person. They fail to recognize that any Fed Chair is less like Solomon and more like the wizard behind the curtain.
Either the Fed doesn’t appreciate the full effects of its decisions and actions, or it is simply satisfied with having rewarded Wall Street, though not Main Street. Whatever benefits accrued from history’s most generous monetary experiment have come at the expense of a generation of elderly retired who have had to choose between spending down life savings or risking those assets in historically overvalued securities. The final chapter on how that unfortunate generation’s retirement will play out has almost certainly not been written.
Far greater pain likely lies ahead, perhaps to be borne primarily by generations which have had no role in approving the Fed’s decisions. Monumental debt loads, like today’s, have throughout history led to greatly inhibited economic growth for extended spans of years. And many of history’s greatest securities market declines have accompanied such periods of economic lethargy.
Our unwillingness to confront the absurdity of allowing a few academics and regulators to orchestrate domestic and world economies is allowing the pain to continue for the elderly retired and to increase for future generations that will almost certainly inherit unprecedented debt burdens. We are allowing Janet Yellen to dig us deeper into a destructive dungeon of debt. Congress and the general citizenry must make their voices heard in opposition.
Congress should immediately set about reducing the Fed’s current dual mandate to a single mandate of stabilizing the currency. Ideally, within that mandate, Fed decision-making would be formally rule-based rather than, as today, with each Fed voting member formulating his or her own non-binding and often fluctuating rules.
Let’s recognize the absurdity of the current arrangement in which any Fed Chair, essentially without veto, plays the largest single role in orchestrating the world economy.
Thomas J. Feeney is Managing Director and Chief Investment Officer of Mission Management & Trust Co., Tucson, Arizona.
For a related analysis of the inappropriate scope of Fed power, please see Tom’s immediately prior blog post “Where’s the Outrage?”.