INSIGHTS

On April 27, 2011

The Fed Answers Your Questions, But Are the Answers Any Clearer?

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Today was a somewhat seminal moment in the attempt by the Federal Reserve to be more transparent in their assessment and explanation of actions. Aside from the narration of minutes that was released hours earlier, one wonders a few things, but one major thought stood out above the rest: do the answers provided offer any more clarity than the previous debates over their economic pronouncements?

The Fed kept policy and statements roughly the same as what has been in place for some time. It seems a “Rip Van Winkle nap ago” that the Fed meetings would arrive at anything other than what was expected or had any significant deviation from the last release. The major deviation of what the general public feels and how it is interpreted (or better term, impacted) by the Fed appears to be on inflation, Quantitative Easing (QE) and the dollar.

A deferral on the dollar to the Treasury department and a vague addressing of qualitative distinctions in the inflation aspects involved with the Personal Consumption Expenditure (PCE) deflator will do little to garner trust and understanding from the general public. Chairman Bernanke’s assessment that gasoline prices may stabilize with a subsiding of political turmoil in the Middle East, may only fuel the protectionist chants about dependence on foreign oil. Recall the mantra of our over dependence on foreign oil has been around since the late 1960s.

On the inflation front, consider the headline differences in the PCE versus the Consumer Price Index (CPI). Although both are not perfect measurements, the PCE is often cited by economists. Accordingly, Chairman Bernanke said the “1.7% - 2.0%” inflation rate in the PCE is well within the range of comfort for the committee.

At the end, we see the European Central Bank’s raising of interest rates to curb future inflation as potentially sacrificing the expansion of several economies for the few. Although, it also assists the Fed in simply deferring future rate hikes due to inflation by slowing a significant amount of global GDP (European Union) which creates a short term disinflationary consumption environment. It does, however, put pressure on the dollar to weaken a bit more in the intermediate term which has shown to only fuel the commodity boom.

Another global component that helps over the short term is the expected contraction in the Japanese economy due to the tragic natural disaster. This should prove to be only short term disinflationary as ultimately, the 40 trillion Yen pumped into the banking system and overall expanding monetary supply should serve to reverse the deflation that has plagued Japan with a minimal amount of benign inflation.

The announcement that Quantitative Easing was on track was already known and any baiting into whether it was successful or leads to QE3 was quickly doused out with ambivalent deflection. We do not see a QE3 for many reasons; however, it has primarily become the equivalent of the “third rail” in the political scene.

While the attempt at transparency is commendable, and somewhat welcome, the answers remained as cryptic as the minutes (as perceived by the general public), and may therefore be even more vilified. It appears that the general public may feel that the answers might have been given in Latin…lost in translation seems to come to mind. Whether written or read, we are reminded of the famous quote by Alan Greenspan: “…if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”

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