Grading the Fed

Remember the Fed?

The Federal Reserve just held a two-day meeting of its open market committee and decided to change almost nothing. Their formal statement contained about half a dozen word changes. Their policy remains as it was: add to the money supply, keep rates at zero, and monitor the economy. It’s been that way for the past four years or so. Yawn.

Time was when we waited on the Fed’s pronouncements with bated breath. Fed-watchers would gauge the size of the Chairman’s briefcase to divine whether he would advocate higher or lower rates. Now it comes as a surprise that the Fed is meeting. The response is often, “Really? So close to the election?” or “Why do they even bother? What do they have to decide?”

But the Fed has a continuing role to play in this recovery. The banks they oversee talk about the three-C’s of credit: Cashflow, Capital, and Character. Those are the principal factors banks use to evaluate a company’s ability and willingness to pay back its loans.

Well, the Fed can be judged on a three-C framework too. Only these C’s aren’t measuring whether they’ll pay back a loan, but whether they’ll keep money flowing through the economy. The Fed’s three-C’s are: Communications, Commitment, and Credibility. Communications are how they manage expectations—forecasts, statements, and press briefings. Commitment is their willingness and ability to keep policies in place. And credibility is their true stock-in-trade: the assurance that they will do what they say.

The three-C’s of credit are a good way to evaluate how risky a loan might be. The three-C’s of central banking give us a tool to tell how trustworthy the Fed is as well.

Douglas R. Tengdin, CFA
Chief Investment Officer
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