January 2009

When I said, “Time is all we need” I wasn’t exactly covering all the bases. While time is essential, actions like the one taken by the Fed at this meeting, go a long way towards addressing the problems this country is currently facing. I might go so far as to say that this may be the turning point we have been looking for.

It was stated that the overnight rate might be at this low level for some time. After the meeting an official explained that the Federal Reserve’s benchmark for monetary policy would be the size of the Fed balance sheet and the type of assets it acquired. The briefing describing what the Fed was going to be doing was very transparent, and it effectively ended decades of reluctance to explain Fed actions beyond the usual brief statement.     

This form of monetary policy referred to as “quantitative easing” is certainly a change in the mode of operation by the Fed. The only other major central bank in modern times to utilize this strategy was Japan in the 1990s. However, the 1990s are often referred to as Japan’s “lost decade” because they had mixed results. The Fed considered this method in 2003, when the fear of deflation forced the Fed to lower the funds rate to 1.00 percent. Had the 1.00 percent funds rate not been able to turn the economy around, and if deflation became a problem, we were all assured that the Fed had other options.

A Fed representative assured the markets that what the Fed will be doing is distinct from the Japanese-style quantitative easing. The Fed will be focusing on assets.

A major concern is the fact that the 1.00 percent funds rate that was in place for twelve months in 2003 and 2004, has been linked to the current sub-prime debacle, as it provided the markets with extremely cheap funding.  Personally I believe it did play a role, as I have mentioned in earlier FYI’s. However, I have also stated that I don’t believe the Federal Reserve had very many options. I am afraid Chairman Bernake finds himself in the same predicament.

I believe this Federal Reserve action may be a turning point, however, I still believe the recovery is months away. One recent development is the announcement by the National Bureau of Economic Research (NBER) which made it official that a recession began in December of 2007. It is now over one year old. Let me remind you that a post World War II recession lasted approximately eleven months, however there have been recessions such as the 1973 to 1975, and the recession of July 1981 to November 1982 that lasted seventeen months. The current recession has a number of similarities to those earlier recessions; primarily the fact that it is led by the consumer.

The title this month, These Are Historic Times, refers to the rate, the “quantitative easing” and more transparency in the announcements. The monetary policy by the Federal Reserve is being rewritten. While the title is directed towards the monetary policy, overall we are living in historic times, not necessarily always enjoyable, but historic never the less.

My hope is that your time is always enjoyable and that 2009 treats you well.