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Federal Reserve: Increasingly Defensive and Admits Structural Issues

Posted by Larry Doyle on November 22, 2010 7:55 AM |

The Federal Reserve may be America’s greatest enigma.

The Fed would clearly much prefer to remain opaque in the midst of our current economic turmoil. However, even the ‘all powerful’ Fed is unable to withstand the pressure from those seeking answers and clarity while navigating our economic landscape.

I have often tried to highlight the Fed’s shortcomings and inconsistencies. From the Fed’s overly optimistic economic projections to its unwillingness to openly admit the ongoing structural issues and changes within our economy, I believe the Fed has been playing politics for far too long and well beyond its goals and mandates.

Those political games are now coming back to smack the Fed in the face. Secretary Geithner and others can whine and moan all they want about Fed critics maligning our central bank’s credibility. Geithner and others need to appreciate that they themselves have lost credibility as well. Why’s that?

When central bankers and public officials are not honest and straightforward with the American public, they put themselves in the position of feeling the public’s wrath. In response to that wrath, it is no surprise that those very same central bankers and officials may attempt to act in a somewhat more honest fashion. I believe this reality is simple human nature and I witnessed it overnight in reviewing a Financial Times commentary, Pessimistic Fed to Slash Growth Forecasts,

The US Federal Reserve will slash its growth forecasts and predict higher unemployment when it releases updated economic projections this week.

The Fed will release the latest forecasts made by members of its rate-setting open market committee on Tuesday, alongside the minutes of their November meeting, giving a complete picture of why they launched a new $600bn round of asset purchases.

The revised forecasts will show how the Fed became much more pessimistic over the summer and also highlight fears among a few members of the FOMC that some of today’s 9.6 per cent unemployment rate is structural and will take years to cure.

I believe this last statement is a crock. “Much more pessimistic over the summer?” Stop it. The Fed has known all along that our economy is going through significant structural changes and is drowning amidst waves of debt. I believe the Fed has tried to ‘talk’ the economy through our turmoils in the hope of maintaining consumer confidence. Now they are being called on the carpet for their policies and programs and finally held to account.

When the FOMC published its last forecasts in June most members thought that 2011 growth would be between 3.5 and 4.2 per cent, but many now think growth will be between 3 and 3.5 per cent, and some expect less than that. (LD’s highlight)

FOMC members have made particularly aggressive upward revisions to their unemployment forecasts, with a large number now predicting that it will still be 8 per cent or above at the end of 2012, compared to the 7.1 to 7.5 per cent that they forecast in June.

“Because I expect hiring to strengthen only gradually, the unemployment rate is likely to remain elevated for quite some time. In fact, I do not expect it to fall below 8 per cent before 2013,” Sandra Pianalto, president of the Cleveland Fed, said in a speech last week.

Some Fed officials have become concerned that workers have the wrong skills, or are trapped in the wrong places because they cannot sell their home, and will struggle to find jobs even once the economy fully recovers.

This final statement addresses the ‘structural’ changes and is a whiff of truth amidst so much political Fed-speak. This reality is not a new development but was present in 2007 when our economic downturn began.  

What will the Fed’s quantitative easing program do to address these structural issues? Nothing. Let’s stop the nonsense!!


Navigate accordingly.

Larry Doyle

  • fred


    Dr John Hussman’s comments today: Outside the Oval/ The case against the Fed, is a must read.

    • LD


      Great read. Thanks for sharing it. For our readers, here is the introduction to Hussman’s piece,

      The Case against the Fed

      Ever since the Bear Stearns bailout, I’ve been insistent that the Federal Reserve is increasingly operating outside of its statutory boundaries. As I noted in the March 31, 2008 weekly comment (What Congress and Investors Should Understand about the Bear Stearns Deal):

      “The clear historical role of the Federal Reserve has been to manage the composition of Federal liabilities (by varying the mix of Treasury securities and monetary base – currency and bank reserves – held by the public). The recent transaction is a dangerous break from that role, in which unelected bureaucrats are committing public funds to facilitate private business transactions and selectively defend the holders of corporate securities. Only Congress has the Constitutional right, by the representative will of the people, to commit public funds. The Bear Stearns deal is a dangerous precedent and a dilution of Congressional prerogative.”

      My concerns here have nothing to do with the direction of the stock market. Ensuring the legality of Fed actions is not a Democratic issue, a Republican issue or a Tea Party issue. Rather, it is about whether we want America to function as a representative democracy. We hear a lot about the risk of “politicizing” the Fed, as if it should somehow operate outside of Constitutional checks and balances. This idea is insane. Reserving the appropriation of public funds to Congress, and by extension to the will of the American people, is central to the meaning of democracy. There is clearly a mindless carnival of circus clowns on financial television that is perfectly willing to look the other way as long as the Fed encourages risk and bails out reckless behavior. We should recognize what we stand to lose.

      Powerful stuff….we stand to lose credibility bother here at home and in the eyes of the world. What is the price of

      Fred, thanks for the link!!

      • fred

        LD your most welcome.

        I also find Hussman’s discussion of Maiden Lane and other off balance sheet transactions as interesting. Summarized as follows:

        The Fed, under it’s own authority, has created off balance sheet shell “companies” to purchase private debt of uncertain quality, undisclosed value and uncertain duration, when the Feds role is clearly limited to providing short term liquidity to “private corporations” in illiquid markets only. (under the Federal Reserve Act sec 14.1 as amended by section 4c of the Homeowners Loan Act of 1933).

        Not only do “Maiden Lane type” transactions of more than 90 day duration, clearly appear illegal under the Federal Reserve Act as amended, it is a page straight out of Enron, whose executives are now doing prison time for setting up similar off balance sheet “shell companies”, to generate phantom profits!

        Another case of the ends justifying the means?

        • LD


          The Fed would never be held accountable by COngress or the courts for the extraordinary measures taken at the time these vehicles were established to purchase these assets…

          BUT, the cost of those vehicles and transactions are significant, at this juncture unknown, and ultimately borne by the American taxpayer.

          I would caution people not to think those costs may not also hold the seeds of tyranny and revolution. Why do I say that? See what is happening in Ireland right now?

          Rioters, Police Clash in Ireland

  • Mark G

    Audit the Fed! End the Fed! Stop the looting, start prosecuting! Ní uasal aon uasal ach sinne bheith íseal: Éirímis

  • Hawk

    Monetize the debt?

    Why equilibrate Larry?

    Call it what it truly is. Since the Fed now owns as many Treasuries as China,we as citizens are taking the same hot poker as they are, right up the alimentary canal.

    This is debt repudiation clear and simple and we are our own creditors! This is an internal debt restructuring as defined by Rogoff and Rheinhart.

  • Peter

    Japan’s Tale of Caution on Fed Monetary Policy

    The BOJ was anything but successful in utilizing quantitative easing. Additionally,

    Mr. Shirakawa also cautioned that maintaining easy monetary policy “for an extended period” will likely yield unwelcome unintended consequences.

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