This year the Federal Reserve marks 100 years of … something.
A century after President Woodrow Wilson brought the Fed to life, our central bank still loves its secrets.
Now, in 2013, the secrets are coming out. Today I’ll tell you about one of them.
The Fed was born in an era of change, much like our own. The U.S. economy endured eight recessions between 1890 and 1914. The old world’s banking system simply couldn’t adapt to the Industrial Revolution. The “Panic of 1907” was the last straw. Pressure grew for some kind of central bank, but many business people were suspicious of handing so much power to bankers.
The argument that followed ended with a compromise we now call the Federal Reserve System: 12 banker-run regional reserve banks and a politically appointed board of governors — now headed by Ben Bernanke.
President Wilson, perhaps foreseeing that the Fed governors would themselves need some oversight, insisted the law mandate another body, one largely forgotten until now. The “Federal Advisory Council” consists of 12 bankers, representing each of the Fed districts.
The law requires the Board of Governors to meet with the FAC at least four times a year. The council’s job is to keep the Fed governors informed about business and banking issues affecting their regions.
These meetings happened in near-total secrecy for almost a hundred years. Just a few days ago, the curtain fell. The Fed’s secrets are coming out … and they’re already rocking the markets!
Following a Freedom of Information Act request from Bloomberg News — which the Fed resisted vigorously — the FAC last month released minutes from its quarterly meetings since 2011. Going forward, officials said they will make public the council’s minutes two weeks after each meeting.
The next one was already scheduled for May 17.
On May 31 — last Friday afternoon — Fed HQ quietly released the May 17 minutes. An otherwise-quiet day on Wall Street turned exciting in the afternoon. Stocks sold off and bond yields jumped.
What happened? What did traders see in this boring document?
Thanks to Bloomberg, you can read it for yourself here. You’ll see a series of questions and answers. Keep in mind that the Board of Governors is asking the questions, and the Federal Advisory Council is answering them.
The governors are legally bound to consider the council’s input as they make decisions affecting the economy.
Fed documents usually save the best for last. In Item 8 (page 14 of the document linked above), the Governors ask about monetary policy — essentially “How are we doing?”
The council answered with a polite “Terrible!”
Here are a few excerpts…
- “Uncertainty about fiscal and monetary policy is deterring business investment.”
- “Constant injections of new reserves have not returned the economy to the vibrant upbeat model it used to be … current monetary policy is ineffective.”
- “Low bond yields are disruptive to management of fixed-income portfolios, retirement funds, consumer savings and retirement planning.”
- “Further, current policy has created systemic financial risks and potential structural problems for banks.”
- “It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses.”
- “Given the Fed’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.”
Not exactly a ringing endorsement, is it?
I would love to hear an audio recording of the “Luncheon for Council and Board Members” that was next on the agenda. I suspect it was a little tense.
The benefit to receiving all these meeting minutes at once is the ability to see how times have changed … and quickly, at that. The Council was singing a far-different tune earlier this year …
The most-recent minutes are even more intriguing compared with the previous meeting. The monetary policy section of the Feb. 8 FAC minutes practically overflows with praise for the Fed …
- “Believing the economy to be improving but still vulnerable, and recognizing the high quality of the Federal Reserve’s information-gathering and analytical resources, the Council continues to support the FOMC’s current accommodative monetary policy.”
- “The recovery in the critical, rate-sensitive areas of auto sales and housing is especially encouraging.”
- “The Council believes that it is not yet time to withdraw monetary accommodation.”
- “The Council welcomes the announcement following the December 2012 FOMC meeting of thresholds of unemployment and inflation rates that will guide future policy.”
So here we have two meetings of the same very intelligent, very powerful people, just three months apart … with radically different moods and conclusions. What changed?
We can’t know for sure, but I have a theory.
In February, the FAC members thought their remarks would be “off the record.” Then Bloomberg won its battle to have the minutes released. On May 17 the FAC knew the public (and the markets) would soon be “in the loop.”
Did the prospect of being quoted jolt the Federal Advisory Committee out of fawning adoration and back to reality? Possibly so, but we can’t rule out other explanations.
Maybe they are privy to economic data the rest of us haven’t seen. We also know the Fed is keenly aware of its influence on the markets. The May 17 FAC minutes could be part of a broader messaging strategy — one brick in a path leading us all toward something as yet unknown.
One thing is certain: the Federal Reserve and its Advisory Council are up to something. We’d better all pay attention.
Here are some other stories you’ll want to watch …
In Other Market News:
- Jobs growth was slower-than-expected last month, according to the ADP Private Employment Report. Economists expected to see 165,000 new jobs, but the data released earlier today showed only 135,000. This is a bad omen for the Labor Department’s more-comprehensive monthly employment report, due out Friday morning.
- The new hiring ADP found was mainly in service industries. Manufacturing and construction companies actually reduced their payrolls. One bright spot in the report: Overall hiring was up in small businesses as well as large and mid-sized companies.
- JPMorgan Chase (JPM), thought by some to be the smartest bank on Wall Street, agreed to take another $842 million loss in the municipal bankruptcy of Jefferson County, Alabama. JPM previously agreed to a $722 million SEC settlement for misleading local officials. The combined settlements mean JPM lost about 70% of its $1.2B investment in Jefferson County’s sewer system bonds.
- New Japanese Prime Minister Shinzo Abe is reportedly looking toward women to help pull his nation out of its economic nosedive. Abe has already called on corporations to have at least one female executive — a dramatic shift for Japan’s male-dominated business elite.
- Japan’s labor participation rate for women is 62%, compared to 80% for men. Making them equal will require 8.2 million women to start working. To facilitate this, Abe’s government intends to open 250,000 day care centers over the next few years.
- For the first time ever, emerging-market nations will account for more than half of the world’s economic growth in 2013. Financial Times reported the latest milestone, citing data from the International Monetary Fund and the McKinsey Global Institute.
- Richard Dobbs, a director of McKinsey Global Institute, told FT that “China’s economic urbanization and transformation is happening at 100 times the scale of the UK, the first country to urbanize and industrialize and around 10 times the speed … and so China’s industrial revolution has 1,000 times the momentum of the UK’s industrial revolution.”
We’ll have another “Article from a Master” tomorrow. In the meantime, we love to hear from you, even if we can’t answer each question individually. Knowing what’s on your mind helps us choose the best-possible content to include in your Afternoon Edition.
Personally, I’m still reeling about this Fed story. What caused this change in tone by the Federal Advisory Council? Three months seems like much too short a time to justify this HUGE swing in sentiment.
What do you think? Let me know here.
Good Luck and Happy Investing.
Uncommon Wisdom Daily
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