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The Federal Reserve’s Political Gamesmanship

Posted by Larry Doyle on January 5, 2011 6:36 AM |

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.

  • HC

    This is one of ur best I’ve seen since following my Crusader economist guru/strategiest/indpendent thinker extraordinaire/insight expert!!!

    With the numerous fundamental and macroeconomic issues here and across the globe its hard to read these wildly bullish outlooks from Birinyi etc to start the year. Who was guy made big proclamation while back saying “recovery” started June ’09 – he shd be banned from speaking or typing or have disclaimer attached of “beware.” How is US in midst of recovery when the State of Illinois and others are a sneeze away from being insolvent? 17% unemployment including those who’ve given up looking for work? Financials under siege a la BAC given bad loan exposure and everything else. Some1 did comment yest that BAC is now in worst shape out of any1 – C has gotten a hall pass!

    Of course I’m distressed guy and as result have tainted view…hard to fight the rally we’ve seen over last 6 months across all asset classes – ex Munis of course! Think I’ve mentioned to u b4 but just in case ill say again – just bc high yield is the cheapest asset class…doesn’t make it cheap. In midst of your “walking pneomonia recovery” there r many “walking pneumonia companies” w bad balance sheets and sectors that r impaired…many of which r getting bandaided by refinancing due to technical wall of money that must go somewhere for the moment.

    The smartest guys that I know r sitting on biggest cash positions they’ve had in long time as compelling oppys few and far between. And trying to wait it out while every1 keeps false hope of the “recovery”

  • fred

    “I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin!”

    1834 quote by President Andrew Jackson re: the evils of central banking.






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