Entities

Federal Reserve of the United States

Federal Reserve of the United States
The Fed
FED

The Federal Reserve of the United State (FED) is the central bank of the United States of America

More About Federal Reserve of the United States

Federal Reserve Purpose (According to the Fed):  
To promote the effective operation of the economy and, generally, the public interest
  1. Conduct monetary policy - to promote max employment and stable prices
    • Open Market Operations (QE programs, Adjust Federal Funds Rate)
    • Adjust the Discount rate for non-member commercial banks
    • Set Reserve Requirements (more reserves = less lending)
    • Term Deposit Facility
    • Overnight Reverse Repurchase Agreement
    • Interest on Required and Excess Reserves
    • Forward Guidance & Talks (Not an Official Tool)
  2. Promote the stability of the financial system
  3. Promote the safety and soundness of individual banks and monitor the impact of the system as a whole
  4. Fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S dollar transactions and payments
  5. Promotes consumer protection and community development/research

What Drives the Feds Policies/Actions?

  • Inflation measures
  • Labor Market (Unemployment,  Job Gains)
  • GDP growth
  • Housing Starts & Sales
  • Interest rates 
  • Yield curve

Stock-Market Centric Era (2006 - 2017)
  • This was seen as a time when Fed Chairs would intervene (verbally or through policy) if stock markets corrected
    • They appeared to want to keep markets up (although not one of their official mandates
  • The market expected the fed to take action if stock markets dropped
  • Covered Chairman Ben Bernake's and Janet Yellen's tenures
  • Their actions became known as the "Fed Put"
  • Became so apparent that newspapers and magazines created cartoons outlining this behavior
  • Ended with chairman Jerome Powell, who follows an economy-focused approach


Federal Reserve Transparent Communications

  • In the 1980s and earlier the fed provided little communication
    • No press conferences or details were provided - just rate changes
    • The Primary Dealers got info first by being on the other end of Fed Trades
      • Primary Dealers could then share this information with top clients
    • Broad market had to guess out policy changes based on market reactions, leaks and rumors
  • Fed now communicates aggressively (2018)
    • Press Conferences, Detailed Policy Announcements & Statements, Publishes Monthly Meeting Minutes, Economic Forecasts, Interest Rate Dot Plots, Fed Governor Speeches
  • Publishes full transcripts of its eight annual meetings with a 5 year lag



Federal Reserve Criticisms

  • Economic Forecasting has been inaccurate - worse than a coin flip!
  • It claims to be independent, but isn't really
    •  There are many of examples of where it acted to help current politicians
      • 1934 Confiscation of gold
      • 1940s low interest rates to help US finance WW2
      • 1971 end of gold standard under Nixon
      • 2008 guarantee of all FDIC bank deposits and money market funds
  • Encourages malinvestment when it suppresses interest rates
    • Companies invest in plants, assets and equipment that would not be profitable aside for cheap money
  • Data it uses has become increasingly unreliable and manipulated over time:
    • data overplays growth
    • data downplays actual inflation
    • data misses structural economic issues
    • Ex.  Unemployment is low in 2018, but tens of millions aren't working and are uncounted
    • Ex.  Inflation metrics say TVs have gotten cheaper over time due to their better tech.  But in reality they still cost a lot!


2019 Policy Reversal

  • Before Jan 2019 the Fed was consistently raising rates and pursing QT (Quantitative Tightening)
  • The Fed (Jerome Powell) verbally reversed course in Jan 2019 after credit and stock markets tanked in Dec 2018
  • Concern that the Fed started to increase rates and tighten too late in the business cycle - FED actions started to cause a crisis
  • Criticism that the Fed started to tighten after creating a bubble in everything:
    • Historically high stock market valuations
    • Historically low interest rates (and correspondingly high bond prices)
    • Historically high debt levels
    • Historically high corporate debt levels
    • Historically high levels of corporate debt