Ask Archer

What's with all this Fed worship, anyway?

A reader writes to ask, “Archer, what is with all this Fed worship, anyway”?

Archer replies:  The history of mankind is a tale of false deities. In many cases, the failure to appropriately prostrate oneself before these gods – to “roll over” in dog parlance – was thought to unleash ruination. These days we live in a more secular society, but we now have the “Fed.”

The Fed’s head god, or “chairman”, speaks officially following each of the eight yearly conclaves held by the “Federal Reserve Open Market Committee,” which the Fed’s minor gods, or “governors,” also attend. Outside the meetings these governors seem to have little purpose other than to wander about, mindlessly chanting various incantations, with “We still have work to do. We still have work to do,” being but the latest example.

The Fed itself generates an ongoing series of runic pronouncements including something known as a “dot plot” which purports to capture the whole of economic reality in a series of graphs, kind of like a pointillist painting. Its priests have, over time, depended on other oracular signs like they “money supply” and the “yield curve” each of which has been said to allow them to divine the mysteries of human behavior.

Whatever. Your question about the Fed is at heart an epistemological one. In other words, am I, the investor, rewarded for worshiping at the altar of the Central Bank? In one sense, the answer is “yes.” (Not investment advice.) The Fed, in its wisdom, does control the Fed Funds Rate – the cost of money – and that in turn flows through into the cost of a lot of other things. Equities are priced in part off of this and relative to the available returns of other assets, like bonds. Higher rates directly impact bond yields and the movement and availability of capital.

Belief conjures reality. But are the Fed’s predictions any more accurate than that of the average brokerage firm economist? Here we have the advantage of hindsight, and the evidence does not smile on those who would be prophets. You don’t have to go back far to see this. Team Transitory is a good example. This assemblage included both the current Fed chairman as well as the present Secretary of the Treasury and was predicting as late as mid-2022 that rising inflation would quickly subside. More recently, the Fed writ large was all in on “vigilance on credit,” as an April 12 Bloomberg story reported. This was taken from the March 21-22 FOMC meeting notes. Silicon Valley Bank crashed on March 10. Whoops!

Of course every dog has its day and the Fed has been right on occasion, too. And the point of this is not to pick on the central bank or central bankers; it is just to suggest that caution is warranted before investing any institution (or individual) with oracular powers. You can’t see around corners and neither can they.

The modern Fed has been caught in a cycle of creating problems it then purports to solve, only to create further, unforeseen problems. The reign of Alan Greenspan from 1987 to 2006 was perhaps the apotheosis of monetary authority worship and look how that panned out – first with the Dot Com crash in 2000 and a few years later with a massively leveraged real estate sector whose repricing nearly resulted in a second Great Depression.

Woof.