Understanding the Fed’s “Promises”

March 12th, 2016 by

balance of gold and dollarWhen it comes to the world’s current monetary regime, the phrase “based on nothing but promises” certainly rings true. Especially in a prolonged era that has been defined by fiat money, this is all that the central banks can offer. Every time we speak of the “value” of dollar bills (or any other currency, for that matter), we are placing our faith in an empty promise.

Only tangible assets, whether they are productive (like resources that can be used: oil, copper, silver, even firewood) or are valued for their scarcity (like gold and diamonds), can truly be vehicles for value. Not ever-depreciating IOUs.

To the same token, anytime a central monetary authority such as the United States’ Federal Reserve makes a public statement, or gives some form of guidance to the markets, remember that it is merely a promise—and a vapid one, at that.

Narayana Kocherlakota

Narayana Kocherlakota

A recently retired governor of the Minneapolis branch of the Federal Reserve, the typically dovish Narayana Kocherlakota (served 2009-2015), admitted as much in an op-ed this week on Bloomberg. Through vague and incomplete public statements, Kocherlakota accuses the Fed of offering waffling promises. He suggests that “the Fed needs to think more carefully about the way it communicates its plans and actions” before issuing such guidance.

Therein lies the point: Even though the markets give such gravity to what the Federal Reserve says, the central bank simply exploits this belief and peddles false hope and empty promises.

March FOMC Meeting

So what can we expect from the talking heads at the Fed (led by Chair Janet Yellen) at next week’s upcoming Federal Reserve Open Market Committee (FOMC) meeting, the first since it chose to raise interest rates 25 basis points in December? Most analysts aren’t expecting any fireworks, considering how disastrously the stock markets fared after December’s rate hike—not to mention the enormous blow this dealt to global confidence in economic conditions in general.

federal-reserveYet, this lack of actual policy changes gives even more weight to what the central bank merely says, and how it casts its decision. Recall that during 2015, when there was no rate hike until the last meeting of the calendar year, investors and other market participants seemed to hang on every slight word change in Fed statements in the absence of any action. With the FOMC backtracking from its target of about four incremental rate increases this year, the door has swung wide open again for words to be minced by Yellen et al. This is generally known as “Fedspeak,” implying the contradictory and ambiguous use of language found in the “Newspeak” of George Orwell’s 1984.

While some have claimed that the last two Fed Chairs, Ben Bernanke and Janet Yellen, are more direct with their language, this is hardly the case. They are simply becoming more effective spinsters, building off of the playbook established by their predecessor, Alan Greenspan. Consider this example of confusion generated by a single Greenspan speech from 1995:

New York Times headline: “Doubts Voiced by Greenspan on Rate Cut”

Washington Post headline: “Greenspan Hints Fed May Cut Interest Rates”

Former Federal Reserve Chairman Alan Greenspan (photo: Federal Reserve)

Former Federal Reserve Chairman Alan Greenspan (photo: Federal Reserve)

These two headlines were generated by the same testimony and appeared on the same day.

Anticipate more of the same Fedspeak when the FOMC meets next week!

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.