Month: August 2009

Pre-season FED Football

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.


The August 11-12 Federal Reserve meeting is the subject of intense market speculation about signals the Fed may or may not call about the timing of future interest rate hikes, but most of this chatter is as premature as calling the Super Bowl winner based on the first preseason football game.

It is far more likely that the Fed will treat its statement at the meeting’s conclusion like the first scrimmage of the season and not show much of any new game plan that might alarm market participants just as the economy is showing signs of some stabilization.

To the Fed’s thinking, the economy has been in the Emergency Room and then in Intensive Care for several months, and is just now entering the Recovery Room.

While there now may be justification for  the Fed to begin to remove some of the IV lines it has fastened on to the organs of liquidity and credit flow in the economy (like Treasury purchases and purcheses of Government-backed housing issues), it will do so as conditions warrant and not because of any prospective statement that will tip its hand as to timing (beyond perhaps indicating that there won’t be any extension of these operations beyond their previously targeted caps).

The question of monetary (as well as fiscal) stimulus is being re-fought politically in an ironic way lately. The negative case had been proferred to the effect that stimulus of all kinds should be abandoned because it was not working. After recent economic data on unemployment,  housing  and “cash for clunkers”, however, the anti-stimlus argument has shifted to the notion that further stimulus should be suspended altogether because the economy is starting to get well and further Government debt will choke off the nascent recovery!

The increasingly ideological business media commentators on Cable TV perhaps cannot see this remarkable about face for what it is; but a good ESPN reporter would recognize a “naked reverse” right from the snap count.

The Fed unfortunately now has to operate in a poisonous politcal environment where it is lumped with Obama as big, internventionist, Socialist  government intruding into every nook and cranny of the free market economy. Theologians will tell us that all sin starts with exaggeration (see, for example, the serpent’s sales ptich in the Garden of Eden), but our political “dialog” is reaching new highs (or lows) in this regard as Brown Shirt tactics are used to disrupt and shut down Town Hall meetings across the country with allegations of Government “death panels” imposing mercy killings on the old and disabled under orders from the White House.

While the Fed meeting itself will be spared  such intrusions, its Chairman  has been caught up in the crossfire in Congress about how the Bank of America/Merrill Lynch deal got done as well as the proposals for new regulations of the financial markets. In these circumstances, Dr. Ben is liley to take a firm graps of the Hippocratic Oath as he marks up the Fed’s statement from the last meeing — first, do no harm: which, at this point in the recovery process, is likely to mean “change the wording as little as possible”.

Indee=d, with Bernanke himself up for a “contract extension” by the onset of winter, it is predictable that the Chairman will not show his full playbook much before playoff time in January as long as the “other side” (inflation) is not making any notable progress on offense. As everyone knows, defense wins Super Bowls anyway, and right now, the best defense against market anxiety — which really could mess up the patient  the recovery room like a nervous relative’s hysterical visting hour — may just be a very tactical “punt” on policy change hints.

One “PS” : the politicians and radio and TV commentators who are fanning the flames of fear and hatred and in the very important health care debate — which has much to gain from a  respectful hearing of all sides of pro’s and con’s —  are playing with fire. Mob hysteria has a way of apparently justifying and ultimately producing individual acts of “patriotism” that will bring us back to the days of profound national grief.