Was It Always This Way?
How well can anyone remember past Federal Reserve Chairs? There was Volcker, who allegedly solved the inflation crisis by raising rates and bringing about a recession. After Volker there was Greenspan who is still referred to as “the Maestro.” Followed by “Helicopter” Ben Bernanke... a name he probably doesn’t appreciate much. After Ben came Yellen and now Powell. With each new Chair came a bigger and bigger balance sheet and expansion of central bank powers. We now live in an era where the Fed garners a significant amount of attention; but was it always this way?
Roughly every 6 weeks the world waits to see what the Fed will say, closely listening for clues as to what they might do next. A significant amount of our time and decision making is heavily wrapped around this elusive club of central planners who create money at will and determine the benchmark interest rate for an entire nation.
As per usual, leading up to the main event, the economic news headlines are abuzz with mounting speculation as to the decisions to come out of this Wednesday’s Fed meeting. CNBC notes that:
While no action is expected, there could be some mention of the central bank’s possible wind down of its bond program. That could move the markets since the tapering of the central bank’s bond purchases is seen as the first step on the way to interest rate hikes.
The article goes on to say that the Fed may take a year to eventually scale back its $120 billion a month bond purchase to zero, which should then open the door to rate hikes.
Reuters notes a new dilemma on the horizon: a Fed that is now facing higher than expected price increases, accompanied by “slow annual economic growth” (which it blames on supply chain problems) and the rise of the delta variant. No definitive answer was given, but it’s believed that:
Things could play out in a way they didn't expect.
The Fed could always shrink its balance sheet quicker than expected, but the opposite can easily come true and it could find reasons to increase its asset purchases. If an expansion of the balance sheet were to happen this year, it would definitely be something “they didn’t expect,” but still a move that cannot be put past the Fed given how nimble they are to act when circumstances change (according to them).
As the world waits, various stock market indices flirt around all time highs, house prices continue to increase and inflation calculations continue to read red hot, while it was announced just last week that the recession officially ended in April 2020… over a year ago.
But was it always like this?
Did the world always wait to see what the Fed would say or do, speculating the effects on asset and general prices? Given the monumental growth of the balance sheet, the percentage of debt to national debt held, and its robust set of assets like mortgages debt and corporate bonds, it’s safe to say the role the Fed has played in our lives has increased with each passing Fed Chair. Combining its power with the digital age, it's no wonder not a day passes on any business news channel where “the Fed” is not mentioned in some capacity.
It’s difficult to say how sentiment towards the Fed was several generations ago. But if the former Fed Chairs and their escalating level of intervention under each tenure is used as a measure, then our future becomes certain. Any talk of tapering the balance sheet, raising rates, or getting back to some sense of normal will be nothing more than a “transient” phase at best.