Sense on Cents

Is the Federal Reserve independent?

I know, I know, ask a silly question, expect a silly answer, right?

Although the Federal Reserve would continue to pretend it is an independent entity, the fact is it has become another political wing of the federal government. If you did not think so, let’s juxtapose recent comments by Fed officials to real developments within the bond market. How so? Let’s navigate as Bloomberg reports, Fed Officials Said Recovery Insufficient to Alter QE2,……

Fed officials said at the meeting that Treasury yields climbed because of “an apparent downward reassessment by investors of the likely ultimate size of the Federal Reserve’s asset-purchase program, economic data that were seen as suggesting an improved economic outlook, and the announcement of a package of fiscal measures that was expected to bolster economic growth and increase the deficit,” the minutes said.

Really? Are we to believe these Fed officials as to why rates climbed over the last six weeks of the year?

1. “An apparent downward reassessment of the likely ultimate size of the Federal Reserve’s asset-purchase program”? NOT a CHANCE!! Confirmed in today’s release.

2. “Economic data that were seen as suggesting an improved economic outlook”? Heh? Seriously? STOP IT!! Confirmed in today’s release.

3. “The announcement of a package of fiscal measures that was expected to bolster economic growth and increase the deficit”? Yes. This is true.

The Fed officials go one for three. In pro baseball, they may win the batting title. In the real world of central banking, they strike out and lose continued credibility.

Why did interest rates really go up over the last six weeks of the year?

1. Sovereign credit issues in the EU drove rates in peripheral nations (Ireland, Spain, Portugal, Italy) sharply higher and our rates moved in sympathy. (Although a politicized Fed would not want to draw attention to this!!)

2. Nations in Asia raised rates to stem increasing inflationary expectations from potentially overheating economies. (Although a politicized Fed would not want to draw attention to this!!)

3. The municipal bond market sold off very sharply given credit concerns in general and the discontinuation of the Build America Bond program specifically. (Although….I know, I know, you get it about the Fed being politicized.)

While we did not learn about these developments from today’s Fed release, what did we learn?

Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.

Add it all up and we continue to experience our “walking pneumonia economy.”

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own and not those of Greenwich Investment Management. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

This entry was posted on Wednesday, January 5th, 2011 at 6:36 AM and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.