Tuesday, April 29, 2014

Some Very Basic Confusion About the Fed at WSJ

By Bob English

The "Suspense at the Fed," according to David Wessel at the WSJ, is not over continued QE trimming, but "the fate of President Barack Obama’s nominees to the shrinking Fed Board of Governors."  There are only four governors currently, down from the statutorily-mandated seven.  Come May, the Fed may be down to three governors.

Why is this a problem (or cause for suspense)?  Because the balance of power over monetary policy could be tipped by the five regional Federal Reserve Bank presidents who hold seats at the Federal Open Market Committee (FOMC), which currently sets monetary policy.  This gives Wednesday's FOMC Announcement at least the potential to be somewhat interesting (but don't hold your breath).  True, the regional Fed bank presidents tend to follow the central monetary planning heard, but they also tend to be less obsequiously unquestioning of the Fed Chair than the Washington-based governors.
Wessel's own answer to the "so what?" question digs into a bit of Fed history (emphasis mine):

"[T]his influences the balance of power inside the FOMC, and the market-moving statements it makes about its plans at the end of each meeting. When the Fed board is at its full strength, monetary policy is made by votes of the seven Fed governors in Washington and presidents of five of the 12 regional Fed banks, a delicate balance created by the Federal Reserve Act of 1913."

Unfortunately for Wessel, this explanation is just plain wrong.

The "delicate balance of power" was not created by the Federal Reserve Act of 1913, but by the Banking Act of 1935.  Pursuant to the original 1913 Federal Reserve Act, the regional Fed banks could conduct their own monetary policy.  There was a Federal Reserve Board in Washington, but no Board of Governors until 1935.  This prior situation could be described as a more "delicate balance of power" than after Washington created de facto monetary policy hegemony for itself in 1935.  With the institution of the FOMC and its seven Fed governors versus five regional Fed bank presidents, the balance of power was decidedly tipped in favor of Washington.

Hopefully, this puts the present kerfuffle over Senate intransigence when it comes to Fed nominees in the proper perspective.  If anything, the Senate's on its way to rolling back the clock to 1934.  Now, if only Congress would roll the clock back to 1912.

Bob English as an occasional contributor to EPJ.

1 comment:

  1. talk about delicate..............

    Gold Bullion Bar Backwardation Is Truly Historic

    In terms of the relative scale of historicity that can be applied to this current period of backwardation, I knew that between now and last July the amount of time the GOFO rates have been negative was unprecedented since 1999. But I went digging around for the historical data to define “historically unprecedented.”

    It turns out that, going all the way back to 1989 (I can’t find any data prior to 1989, which is probably because gold leasing didn’t really go into full swing until then), there’s only been two other instances when the GOFO was negative. It first occurred in the last two days of September 1999. It lasted only two days. The second time was November 20, 21 and 24, 2008. The backwardation lasted for three days.

    When the GOFO went negative last summer, it began in early July and lasted for nearly 3 months. It went positive for a month then negative again for over two weeks (November). It also spent half of December negative. Since the beginning of 2014, the GOFO has been negative for 34 of the 81 days that the LBMA has been open.