Fisher Investments Editorial Staff
Monetary Policy

The Fed’s Decreased Reserve

By, 09/01/2011

These are uncertain times, no?

The Fed’s been looking to change all that. Chairman Ben Bernanke announced in March 2011 he would hold press conferences after quarterly Fed monetary policy committee meetings—an unprecedented step in US monetary policy. The goal was to improve the central bank’s transparency and accessibility, presumably to “assist” markets in reading the Fed’s future intentions.

Headed into last week’s Jackson Hole meeting of global central bank heads, markets were on the very razor’s edge of their seats, combing the prose for a hint of QE3—but no such directness was to be had. And that’s largely consistent with Bernanke’s recent comments—though the Fed has indicated it’s considering alternative tools to help the economy “as necessary.” That’s about as strong as the language gets when it comes to discussions of further stimulus. Then the Fed’s minutes came out Tuesday, revealing some division and disunity among the members and arguably muddying the waters some.

So, we ask again: These seem pretty uncertain times, yes?

The Fed’s goal of increased transparency is noble but probably mostly ineffectual—it’s a governing body for monetary policy. Leadership 101 is to have unified and clear messages. More talk isn’t necessarily clarifying—a lot of it fuels more speculation and market gyration, particularly in the shortterm.

The Federal Reserve is one of the most evolutionary financial institutions in history. Consider: The Fed’s original mandate in the Federal Reserve Act of 1913 was simply to supervise banks—no explicit economic or monetary goals. But with passage of 1978’s Humphrey-Hawkins Act, the Fed was directed to “promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” Nowadays, Bernanke’s press conferences and increasingly routine appearances on 60 Minutes make the Fed seem more like the godfather of the US economy.

And therein lies the rub—promoting employment and maintaining stable prices are goals frequently at odds with each other. Not to mention mandating the Fed help with employment places a burden on monetary policy makers they’re likely unable to fulfill—especially given the dubious role government can even play in job creation (an area likely better handled by private enterprise than government, as we’ve said).

So combine a Herculean task (maximum structural employment) with one incredibly challenging in a world of fiat, mostly floating currencies (stable prices), and the Fed’s inability to make very clear statements about its future intentions is understandable. Throw in the increasingly global impact of other central banks’ actions (how many folks even knew who Trichet was five years ago?), and the web seems very tangled.

Have the Fed’s attempts at increased transparency helped? We’d suggest not much. And markets seem to largely agree, given they seemed to react in part last week to a message Bernanke wasn’t overtly sending—namely, that QE3 was in the offing. It’s led to even more speculation and meta-text-tea-leaf-augury (um, reading between the lines). The Fed may be more vocal than ever, but that doesn’t mean the message is clearer.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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