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VIDEOFOMC Preview: Meeting Haunted by Ghosts
By
Kevin Depew
Jan 26, 2010 10:45 am
With few policy moves available, Bernanke's tenure tied to the market.
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Staff reports on regional economic situations will be read, conditions in financial markets will be reviewed. Someone whose title really is "Manager of the System Open Market Account" will report on the Fed's open market transactions.
By tomorrow afternoon, all members of the FOMC, including the four members of the Board of Governors and the presidents of all 12 Federal Reserve Banks, will have delivered their views on the outlook for the economy and provided some indication of what they think should be the central banks' next steps. For related commentary, see Jeff Cooper's Market Direction Into the FOMC.
Throughout these bureaucratic machinations, there will also be two ghosts skulking about unmentioned and plain, if not completely unnoticed. One, Marriner Eccles, is older than the building itself. The other, the legacy of Ben Bernanke's tenure as Fed Chairman, is only weeks old (for more on this, see Is Bernanke Too Big to Fail?).
While the policy that's delivered up from this two-day meeting will be parsed into rigid banality by Thursday morning, how these two ghosts relate to one another, their unacknowledged carriage, provides a much more vivid picture of all that's at stake; it's considerably more than the minutes of the meeting will eventually show.
Marriner Stoddard Eccles, the name that marks the Federal Reserve Board's building, is not likely well-known outside of wonkish monetary policy circles, but it should be; Eccles was deeply involved in public policy during the Great Depression and played an active role in both the Emergency Banking Act of 1933 and the creation of the Federal Deposit Insurance Corporation itself. He was appointed Chairman of the Federal Reserve by President Franklin D. Roosevelt in 1934 and held the position until 1948.
If it isn't curious serendipity that the Fed today meets in a building named after Eccles, then it's certainly convenient. The layers of irony surrounding this FOMC meeting -- the committee's members assembled as they are in a vast meeting room in an Art Deco building erected from the ashes of the Great Depression, in a building named after one of the chief architects of Depression-era banking policy and the FDIC, convened by a chairman who's widely reputed to be an expert on such dire economic circumstances -- are almost too rich to peel back all at once. It would take days. Did I mention the Eccles building was named such by an Act of Congress in 1982, the first year in what would eventually become an 18-year bull market, the longest in history? But that's just colorful ambiance. Eccles, the building and the ghost, will haunt FOMC meetings long after this current group shuffles off their respective mortal coils.
The greenhorn ghost haunting the proceedings is the looming vote on Bernanke's tenure as Fed Chairman. To go from Time magazine's Person of the Year for your role as chairman of the world's most powerful central bank to possibly being ousted from the position in less than 45 days is the stuff of legends... and bear markets. Which is why the next few days in the stock market, FOMC notwithstanding, will be critical. Given a lack of policy alternatives at this meeting, Bernanke's hands are really tied. There's really no way to rattle cages to the upside and make a splash. If a temporary bull market genius is re-born every time the market tacks on 20% or so, a bear market dummy is conceived in permanence during every pullback.
America may be the country quickest to condemn and quickest to forget, but it's useful to keep in mind that not everyone survives the spectrum between the tails. We are, after all, still savages in many respects, and woe be to he who falls first under the dreaded countenance of our vengeful sword.
The Washington Post this morning says the Bernanke nomination is "back on track" with Sens. Max Baucus, a Democrat representing Montana, Joseph I. Lieberman, an Independent from Connecticut, and Lindsey O. Graham, a Republican from South Carolina, saying they would vote to confirm Bernanke for a second term. Otherwise, his term expires Sunday. This is all a very long-winded way of saying that the formulaic matters of monetary policy are here subsumed under the association of ghosts. The only meaningful policy consideration occurring at this meeting is the move to supplant the targeting of the Federal Funds rate (the rate at which banks borrow from one another overnight) with the interest rate paid on excess reserves.
Going back more than a year and a half, to the unfolding of the Lehman Brothers collapse, the Federal Reserve essentially lost control of the Fed Funds rate. It is still unable to bring it in, and so when the decision is eventually made to tighten monetary policy -- a decision I believe will come far later than they currently think -- there's a risk that the Fed Funds rate will not respond to a new, higher target, damaging what little credibility the central bank has left.
Right now, the market is predicting with near certainty that on Wednesday afternoon the FOMC will reiterate its pledge to keep interest rates "exceptionally low" for an "extended period". After that, the next most plausible move being priced in is at the November meeting. We shall see.
No positions in stocks mentioned.
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