Is the Federal Reserve irrelevant?
There used to be a time when the markets would hang onto every stray word that a Fed official would utter. There used to be a time when we would wait for the outcome of Federal Reserve meetings with bated breath. There used to be a time when the Fed’s Chairman was considered the second most powerful person in the country.
Not any more.
For the past year or so—ever since the Fed began offering quarterly press conferences—the markets have issued a collective yawn around the time of Fed meetings. It’s as if more information has resulted in less impact. Has Ben Bernanke’s march towards greater transparency resulted in rules and pronouncements that make Fed policy perfectly predictable? Are markets now able to see right through the Fed’s decisions, so they can discount Fed decisions before they happen?
I don’t think so.
The increased transparency has occurred during the Fed’s period of extraordinarily low rates. Rates have been at or near zero for four years now. That’s an unusually long period for rates to be stuck in one place. Part of the reason the markets don’t seem to care about what the Fed does is that they are backward-looking: because Fed policy has been stable, they are predicting that it will continue to be stable. That doesn’t always turn out so well.
Another reason no one seems to care is that it’s hard to point to any marginal effect from the latest Fed decision. It’s hard to say what it means for the economy if the 10-year Treasury yields 1.5% versus 2%.
Finally, bonds and cash seem to be perfect substitutes right now. So for the Fed to expand its balance sheet—and grow from $50 billion in 2008 to $2 trillion now and perhaps $4 trillion in a couple years doesn’t mean anything—no stimulus, and no hyperinflation either. The economy’s problems aren’t monetary, so monetary policy can’t fix them.
But the Fed will continue to make its pronouncements and enact its extraordinary measures, if only to justify its own existence. Just don’t expect it to make any difference for a while.
Douglas R. Tengdin, CFA
Chief Investment Officer