Fed doves and hawks...and a revealing anecdote

Investment Analysis Clubs Macro Economic Trends and Risks
1

Every METAR would like to know the Federal Reserve’s future plans.

The Fed has “doves” who think that inflation will end quickly and more fed funds rate increases will cause a recession with no benefits. The Fed has “hawks” who refer back to the 1970s for the harm caused by pausing a tightening cycle too soon.

Fed Chair Jerome Powell has expresed his firm determination to continue tightening and hold steady until inflation has reached the target of 2% for an extended period. But can Powell be trusted, when he caved to pressure and lowered the fed funds rate in 2019?

How Long Should Powell Keep Raising Interest Rates? Fed Officials Are Divided

Cracks are beginning to emerge over how stubborn inflation has become and what to do about it

By Nick Timiraos, The Wall Street Journal, Dec. 12, 2022
…
[huge snip of doves vs. hawks]

Former Fed governor Randal Quarles, who has known the Fed chair since they worked in the Treasury Department in the early 1990s, said Mr. Powell is determined to avoid Mr. Burns’s mistakes of failing to control inflation.

During a panel discussion this spring, Mr. Quarles told a story of how a newly hired security guard had come to his Fed office late one night after Mr. Quarles accidentally triggered an alarm. After the guard showed interest in the artworks hung on his office wall, Mr. Quarles began explaining why he had displayed an abstract painting done by Mr. Burns.

No explanation was needed. “That’s the guy who let inflation get out of control,” the guard said.

The story shows, Mr. Quarles said, “that this is an institution from top to bottom that knows the one great sin that will be remembered by everyone 50 years later is if you let inflation get out of control.” [end quote]

I wish the Fed would find a nice, neutral rate and keep it steady (with maybe a few tweaks) like they did in the 1990s. (As described in Ben Bernanke’s book, " 21st Century Monetary Policy.") I wish the Fed would quit the Greenspan/ Bernanke policy of raising rates, holding them a short time and then cutting them to zero, holding them long past the point at which the economy has recovered. That leads to bubbles that eventually burst.

Wendy

2 Likes
2

Back in the day “all swans were white” until they discovered ONE black swan. It only took one to disprove the hypothesis.

Same applies to “Every METAR would like to know the Federal Reserve’s future plans.” The undesigned METAR would prefer the Fed to just go away.

The Captain
just tries to make the best of Fed induced volatility

2 Likes
3

I speculate without proof that the Fed missed its opportunity to guide us to a ‘soft landing’ when it pivoted and stopped raising rates in 2018 because of political pressure rather than objective financial data.

5 Likes
4

Yes - that - and the little 2-year pandemic that showed up and our government decided to try to squash it by flooding the market with trillions of printed dollars.

'38Packard

4 Likes
5

That is also one of the problems. Had rates been ~5% before the pandemic, perhaps dramatic decreases to 4, 3, 2% rapidly would have done the trick and gotten us over the period relatively healthily. But instead, they kept rates artificially low for too long, and they only started out less than 2.5% and had to rapidly drop to zero (or negative) rapidly to keep the economy relatively healthy. Now the penalty on the back end may be that rates have to kept “artificially” higher for longer to regain our economic health after the excessive use of easy money for too long previously.

Maybe $1T or $2T or $3T could have gotten us through the pandemic? Maybe $5T wasn’t necessary?

4 Likes
6

In defense of the Fed, they saw a potential 1929 crash and a dysfunctional Congress that was squabbling while the Titanic sank. I sometimes speculate, also without evidence, that the Fed should have let us sink into a repeat of the Great Depression. Maybe tens of millions of starving families in bread lines would have motivated us to pull together.

2 Likes
7

So you don’t think that we still have the possibility of that happening? There is another thread on METaR about people and food lines - the evidence seems to point to more and more need for them recently.

I don’t discount the supposition that this may happen next year or the year after. I seem to recall reading that recessions take a while to manifest…

'38Packard

2 Likes
8

That’s good in theory, but terrible in practice. Let’s say the fed didn’t exist in 2007. And the financial system was allowed to collapse. And that led to wars, including resource wars. And Venezuela saw street resource wars … and you got killed (God forbid) on the street for the olive oil and bread you just purchased.

2 Likes
9

I guess I am ahead of the experts to the extent that I know that I don’t know what the future holds. My oversized FDIC insured cash position is a hedge against the possibility of a deep and sustained crash. It’s an insurance policy that I hope will prove to be unnecessary.

3 Likes
10

Great! And we could go back to the 1800’s when there was a bank panic or depression about every 10-15 years. Since the creation of the Fed the recessions have been shallowed, shorter, and milder,e and the expansions longer and more sustained. With the possible exception of 1929, when the “do nothing” crowd won the day until we were already down in the crevasse, and it took a decade and a world war to get out of it.

That could have happened in 2008, but it didn’t because, well, the Fed flooded and the government decided to do play backstop to the economy as well. The same is true of the pandemic, but it appears they went a bit too far. Personally I’d prefer they go too far than not far enough; I have been through enough recessions and one potential depression to have learned the lesson.

[quote=“38Packard, post:7, topic:84199”]
So you don’t think that we still have the possibility of that [breadlines] There is another thread on METaR about people and food lines

[quote=“38Packard, post:7, topic:84199”]

There is a vast difference between some food pantries operating and “breadlines”.e Fox insecurity has been with us since the beginning of time, even in the most abundant times. We are nowhere near that’ll point in history at the moment.

Some do. Some are V shaped, and recover quickly. Some have a large U trough. Some never happen at all because the soft landing turns out to be “soft” indeed. There is really no way to know, except to keep up on the news and watch for the tells. It looks to me as though the Fed is reacting appropriately given current conditions.

8 Likes
11

That’s very dramatic! You should be a playwright! :wink:

That’s good in theory, but terrible in practice. Let’s say the fed didn’t exist in 2007. And the financial system was allowed to collapse.

Is giving big banks a free hand to steal our wealth is better?

Domesticated animals think that serving humans is worth the servitude. Turkeys give thanks.

Assistant Playwright :innocent:

2 Likes
12

Yes. Sorry, but letting the big banks get bailed out WAS better than a full-on Great Depression. It’s still awful, the bail out isn’t good. But it’s less bad than a Great Depression. I’m surprised that isn’t obvious, honestly. What would be GOOD, on the other hand, was bank regulation. You know, Glass Steagal (sp?), whose repeal helped fuel to a large degree what happened.

5 Likes
13

I was under the impression that the Great Depression was caused by a law that restricted or taxed international commerce.

Glass Steagal was something different

The Captain

2 Likes
14

Wendy,

I have scanned this thread and mostly no relevant information.

Wendy, the FED does nothing next. Yes there could be operation twist but concerning inflation the FED does nothing at all. Yes there will be a few more small rate hikes.

We as a nation either start to export manufacturing products as a deflationary global force or we dont. The IRA is about to come in to play. Things will take care of themselves. We will be okay.

Some of the baby boomers are toast at the bottom of this market.

We really need more Millennials on this board. We’d all benefit and learn a lot.

If any of you have economic answers think to yourselves, “did I learn that from a supply sider”? If you did try to figure out the exact opposite if you want a decent answer to the problems.

15

I think they still could have done it if they had started with 0.25% in September of last year when inflation was already above 5%. 0.25% every month for the last 15 months and we would basically be at the same rate, but with far less volatility.

If one views the history of fed fund rate changes, it seems to be very volatile - both with the decreases and the increases.

That and the fact that way too much of the money went to entities that simply did not need it. People getting the maximum amount from social security were still eligible for full Covid money. I still don’t understand the rationale for the additional financial aid to those on SS.

2 Likes
16

Perhaps if a full-on Depression had been allowed to occur there would have been meaningful reform to the financial system including appropriate falls from grace for the perpetrators.

Instead, we continue to pamper them, and we are no closer to getting at the root of economic dysfunction.

3 Likes