Has the Fed Officially Expanded Its Goals?

Navigating the economic landscape brings us down new and varied paths. In going down these paths, will we be able to double back and return to the main road of prudent fiscal and monetary disciplines in both the public and private sector? I am not so sure. I am also not so confident that our government officials and central bankers fully appreciate the implications of their policies and statements. I saw evidence of that just yesterday. Where? How so? Let’s navigate into the domain of the Federal Reserve.

What are the stated goals of the Federal Reserve? From the Fed’s website, we learn the following:

What are the goals of U.S. monetary policy?

Monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.

What do maximum sustainable output and employment mean?

In the long run, the amount of goods and services the economy produces (output) and the number of jobs it generates (employment) both depend on factors other than monetary policy. These factors include technology and people’s preferences for saving, risk, and work effort. So, maximum sustainable output and employment mean the levels consistent with these factors in the long run.

So that’s why the other goal is “stable prices”?

Yes. Price “stability” is basically a low-inflation environment where people and firms can make financial decisions without worrying about where prices are headed. Moreover, this is all the Fed can achieve in the long run.

Fed-watchers monitor Fed actions to detect how disciplined our central bank is in pursuing these goals. There are always those who will critique the Fed for being too hawkish or dovish in its monetary policy in pursuit of these goals.

This morning, Fed-watchers should be very concerned. Why? Statements yesterday by Fed governors expanded well beyond the scope of stated Fed policy. While Fed chair Bernanke’s comments about the general weakness of the U.S. dollar are to be expected, readers should be aware that the relative strength or weakness of the dollar falls under the domain of U.S. Treasury, not the Fed. Bernanke’s comments on the Fed’s attentiveness to the dollar are not my major concern today. My major concern rests on comments by the Fed’s vice-chairman Donald Kohn. What did he say?

The Financial Times reports today, Bernanke Reassures Markets on Dollar. The final statement in this article stopped me in my tracks. Why? The FT writes in regard to Chairman Bernanke’s comments on asset prices:

“His message on asset prices was amplified by vice-chairman Don Kohn, who said one of the reasons the Fed was keeping rates near zero was “to induce investors to shift into riskier and longer-term assets”.

When did asset allocations and valuations become a stated goal of the Fed? Where does that fit into long term sustainable growth and stable prices?

While I am glad the vice-chairman let the cat out of the bag, if in fact asset allocations and valuations are now a stated goal of Fed policy, might we want to go back and speak to Congress about revising the official goals of the Federal Reserve?

No wonder so many are now ‘following the yellow brick road’ which symbolizes the gold market because with statements such as that put forth by the Fed Vice-Chairman Kohn, we are certainly not in Kansas anymore.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

Visit: Sense On Cents

Be the first to comment

Leave a Reply

Your email address will not be published.