Transformation of the Fed
The Federal Reserve is undergoing an overhaul. Conceived to keep inflation in check and oversee the country’s money supply, the central bank is now essentially directing the economy and moving away from worries about rising prices.
What we’re hearing: The move to act less quickly and forcefully to tamp down on inflation has been in the works for years, but some economist fear that the Fed is moving too far from its original mandate.
- It would be “a significant shift because the new strategy I would interpret as one that tries to deliberately engineer higher rates of inflation instead of just tolerate them should they come about,” Peter Ireland, an economics professor at Boston College and member of the Shadow Open Market Committee, tells Axios.
- “I would worry if I were on the FOMC that the Fed is just trying to do too much fine tuning. … And that by trying to do too much the Fed does risk making mistakes like it did in the past.”
Between the lines: There are other concerns with the Fed’s new stance.
- “Free market enterprise no longer exists,” Scott Minerd, CIO of Guggenheim Partners, tells Axios. “The Fed by essence of what it’s doing has taken control of the market.”
Why it matters: “The definition of market prices is whatever the Fed says it will be,” says Minerd, a member of the New York Fed’s Investor Advisory Committee on Financial Markets.
- “As long as the Fed continues to manipulate the cost of credit in the manner that it’s doing, which it has never done in its history, then you have to adjust your view of the investment paradigm that we’re living in.”
The big picture: Keeping a lid on inflation historically has been the Fed’s primary objective, but with growth and inflation readings undershooting 2% for more than a decade despite near-zero interest rates in the U.S. and developed markets around the world, things look to be changing.
What it means: That change may not only mean lower rates for longer but also more room for stimulative policies like quantitative easing (QE), which was previously an emergency program that has become a standard part of the Fed’s tool kit.
- There’s also long-term potential for its new special purpose vehicles that buy corporate bonds and lend money directly to businesses as mechanisms for holding up larger chunks of the economy.
The intrigue: The idea that the Fed is controlling or setting prices in financial markets was once the fodder of conspiracy theorists and cranks.
- But since the Fed’s unprecedented intervention into credit markets in late March, it has become a general understanding stated openly by economists and asset managers, including those at high-profile investment firms like Deutsche Bank and Bank of America.
Πηγή: axios.com
