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MAKING CENTS OUT OF THE NEWS
Blog #48
(December 17th, 2009)
WHERE DOES THE FED GO FROM HERE?
By Tom McAllister, CFP®
Ever since the financial crisis struck the U.S. economy in the fall of 2008, as I pointed out in several earlier blog posts, the Fed has been running wide open, pumping vast amounts of new money into our economy, and indirectly into that of the world. I continue to think this monetary approach will prove vastly more important to recovery than any actions on the part of either Congress or the administration. The Federal Reserve, in my opinion, should be complimented on both its position and the actions it has taken. The press does not uniformly agree with my views, and just in the past weekend, highlighted two diametrically opposed viewpoints as to what the Federal Reserve Board ought to do and where it should go from here.
Enter New York Times columnist Paul Krugman, an economist, professor, and acknowledged liberal, expressing his view that Fed Chairman Ben Bernanke is "not doing enough to bring down the unemployment rate faster." (With the money gates wide open and with trillions of new dollars gushing into the economy, I wondered, how much more stimulus can the Fed possibly provide without causing 1970's-style runaway inflation?)
Then, on last Sunday’s Meet the Press, former Fed Chair Alan Greenspan weighed in on the issue, confirming my own thoughts: "The U.S. Federal Reserve has done all it can do to reduce unemployment," Greenspan remarked, "and needs to worry more about the risk of inflation from the stimulus it poured into the economy. I think the Fed has done an extraordinary job. There's just so much monetary policy the central bank can implement, and I think they've gone to their limits, at this particular stage."
"You cannot ask a central bank to do more than it is capable of without very dire consequences," Greenspan continued, saying the United States "faces a serious long-term threat of inflation unless the Fed begins to pull back on the stimulus it has put into the economy."
Greenspan further expressed concern about proposed Congressional actions which, he fears, would "very significantly compromise the Fed’s independence." He was referring to the sweeping financial reform legislation passed last Friday in the U.S. House of Representatives. Reform measures included a provision allowing a congressional watchdog agency to audit the Fed’s monetary policy operations. Legislators justified the move by accusing the Fed of "not doing enough to head off the worst economic downturn since the Great Depression".
(From my point of view, the U.S. Congress was largely responsible for the downturn in the first place, due to their meddling in residential real estate mortgage affairs! In my humble opinion, the proposed new regulatory entity would serve as a one-way street to the transformation of the United States into a "Banana Republic" of the worst order!) Greenspan lamented the Congressional move as well. "What you will be getting is a monetary policy more dedicated to political short term considerations, not to the longer term considerations which the Federal Reserve Act is specifically constructed to do," he remarked.
I found several of Greenspan's further comments not only well-thought-out, but extremely encouraging for investors:
· He expects the U.S. unemployment rate, currently at 10 percent, to be
"significantly lower a year from now", albeit higher than historic levels;
· The recovery in the stock market since last spring helps by putting many
companies and most individuals in a stronger position to spend money;
· Businesses are very heavily liquidating inventories. That's coming to a halt,
and loan demand will return. While inflationary pressures will increase with
improvements in both the economy and in loan demand, those are natural
accompaniments to economic recovery. (I expect inflation on the order of
an annual 6-8% during the next three years.
Where does the Fed go from here? I, for one, hope that the Fed will be going in the direction indicated by Alan Greenspan and not that suggested by Paul Krugman!
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