At a time when many fed-up voters in the UK seem to want to get out of the EU, it seems appropriate to use a Churchill quote to describe the utterly dependent nature that our Federal Reserve has chosen to acquire. Yes, we have a nominally independent Central Bank—that is to say that once the politicos have nominated and approved a member of the Board of Governors, they technically vow to keep their “hands off.” Of course, neither really allow a Fed to be independent, and it is hard to say that the shrill voices from 1600 or the Hill have no affect on the voting behavior of Governors. Who really knows how the Board comes to its conclusions? If you still think the FOMC is independent, ask the Regulatory wing of the Fed if it operates as a deaf mute!
That said, 50 years ago or so, the talk in US monetary policy debates among academicians and central bankers who seemingly agreed that a Central Bank had to be politically independent and should make its decisions based on the fulfillment of whatever chartering mandate it was given. Is it not strange, therefore, that the current FOMC finds that “international considerations” have now paralyzed its rate-making decisions? After a feeble 25 basis point (“bp”) raise in December, the FOMC has staggered and stuttered, looking around the world at what other enfeebled CBs are doing and has paused and paused and paused. Talk about ‘waiting for Godot.” Meanwhile, rate-starved fixed income holders now have the privilege of paying their respective governments in Germany and Japan for the privilege of making their savings available over the next decade. Nearly nothing for the insurance in Germany (3 bps) but 8 bps in Japan, a far cry from holding government bonds as a default-risk free investment with a nominal positive yield. Surely, they would have been better this year to buy Gold and stick it in a bank vault!
Meanwhile, for a Fed now fully engaged in the regulation of bank balance sheets in order to root out (still undefined) “systemic risk,” what has happened to independent monetary policies? The answer is quite simple. They no longer exist—and returns to Americans who wish to invest in default-risk free 10 year Govies are shrinking as well.
Oh, well—why not throw out everything we ever learned about monetary theory and policy? If such policies don’t work (according to the Fed), there’s no point holding on to them, is there? One might ask to be shown the theory that has replaced older thinking on monetary policy, but it is to be doubted that the question would even be heard in the board room at the Fed. It doesn’t seem like they have a theory that governs their policy making. Maybe they are too busy telling each other how they are preventing systematic risk via their new “stress tests.”
Well, why should central banking be any different from Health Care, Internet policing, Environment Protection, and Pharma Controls? We have entered the Grand Regulatory State—no point studying Macro anymore…it is irrelevant because the Fed is a totally Dependent Creature—as are we all in this highly regulated political environment. We must speak correctly, we must invest correctly, we must be correct on our identification of the soldiers of terror. We are all now quite correct, are we not? A riddle? Yes. A Mystery? Yes.
Mr. Prime Minister: we need an Enigma Machine to read the Fed’s Code. Please re-open Bletchley Park and start cracking it for us.