Opinion

The Edgy Optimist

Fed tells markets: There is no certainty

Zachary Karabell
Sep 20, 2013 16:00 UTC

So the Federal Reserve did not taper after all, as we know from its mini-bombshell of an announcement on September 18th. Having signaled in May and June that the central bank was likely to pare back its monthly purchases of $85 billion in mortgage and treasury bonds, the bank and its chairman Ben Bernanke essentially said “Never mind,” and decided that now was not the time after all.

The reaction was swift, vociferous and excoriating. The financial community reacted as if it had been stabbed in the back. One longtime trader and respected commentator announced that he was “absolutely disgusted” by the decision or lack thereof. The best line came from a strategist at a leading investment house who said, “I am perplexed and baffled. I do this for a living. I shouldn’t be so confused and confounded.”

Actually he should be. We all should be. The Fed’s decision is a much-needed slap in the face to the financial world. The Fed’s statement was laden with typically stolid prose, but if you could have distilled it and the subsequent press conference by Bernanke, the message would have been simply this: “There is no certainty. Get over it.”

Time and again over the past few years, business and financial elites have decried the lack of certainty. Fortune 500 companies have routinely cited “uncertainty” emanating from Washington as a reason to delay hiring or hold off on investing. That was the primary conclusion of a University Colorado study this spring, whose authors concluded, “If policymakers would like companies to increase their hiring and investments, they should focus on policies that decrease business uncertainty.” That was particularly true at the end of 2012 as tax policy and the sequester were clouded in political controversy.

The hallmark of Ben Bernanke’s years at the helm of the Federal Reserve has been an unprecedented degree of transparency and communication about the thinking and deliberations of the bank. The Federal Reserve was created exactly a century ago, and for most of the past hundred years, even its decisions were opaque. There was no announcement of interest rate changes, and certainly no 24-hour news cycle and media ready to digest and report the minutia.

What difference does it make who runs the Fed?

Zachary Karabell
Aug 2, 2013 17:43 UTC

As this week’s release of government numbers on unemployment and jobs highlight, the American economy is puttering along in the slow lane. And while few things in life are more frustrating than being stuck in the passenger seat of that car, it certainly beats crashing.

The second gear syndrome of our current economic life doesn’t sit well in a culture that demands more. Our macroeconomic numbers may be stable, but they obscure vast differences in affluence and opportunity, depending on where you live, what you do, what ethnicity you identify with, and how educated you are. The official unemployment rate, now at 7.4 percent, has been ticking down, but it is simply a statistic. It says nothing about the quality of those jobs, hours worked, wages paid, and needs met. Those are the questions we need to attend to.

Instead, in Washington at least, the economic discussion is currently dominated by the debate over who will be the next chair of the Federal Reserve. The story has the perfect makings of a Washington horse race. The lead contender, Larry Summers, engenders passions both for and against, while the main challenger, longtime Fed governor Janet Yellen, has captured the anti-Summers vote. Meanwhile, former Fed governor and current head of TIAA-CREF Roger Ferguson, has emerged as a compromise candidate, though no one is quite clear how his name first surfaced, and the New York Times is reporting Obama is interviewing only three people — Summers, Yellen and Donald Kohn, a former Fed vice chairman.

Stormy markets, smooth seas

Zachary Karabell
Jun 28, 2013 13:23 UTC

You could be forgiven for missing the latest installment of market panic over the past ten days. It came and went like a summer thunderstorm — passing over the global financial landscape quickly and violently. But unlike meteorological events that inflict actual harm, the sharp gyrations of financial markets have increasingly less relationship to real-world economies and exist in their own never-never land of self-fulfilling prophecies and conventional wisdom.

The proximate cause of the swoon was June’s monthly statement from the Federal Reserve and Ben Bernanke’s comments that the Fed might taper its purchases of bonds sooner than many market players had anticipated. The exact quote wasn’t exactly dramatic (so few Fed quotes are!):

“The Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.”

Central bankers are saving the world because politicians won’t

Zachary Karabell
Dec 13, 2012 13:17 UTC

The Federal Reserve just announced a new round of measures designed to keep the money flowing. Central bankers – not to be confused with the heads of private banks that have received so much opprobrium for their role in the financial crises of the past years – are not noted for their charisma or their communication skills, but their role in shaping today’s world, shadowy at times, could hardly be greater. The question is: Are they helping or harming?

Almost exactly a year ago, on the night of Nov. 30, 2011, the world’s central bankers acted swiftly to stave off yet another near-collapse of the global financial system. In the weeks before, equity markets had sold off hard as the eurozone continued to simmer, but that was a mere warning. The real crisis was soaring costs of borrowing for Italy and Spain combined with a nearly complete halt of lending between banks. That too had been the critical moment in the fall of 2008 – once banks stop lending to one another, there is only so much cash on hand. Once depleted, that’s it. No checks cleared, no money at ATMs, nada. You can easily imagine what happens then.

The actions the bankers took in the dark of night were relatively simple: They told the world’s banks that they would be able to go to each central bank and get funds. That may not seem like much, but in the world of finance, it was enough, and it was everything.

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