Federal Reserve of the United States

1. Conduct monetary policy - to promote max employment and stable prices

• Open Market Operations (QE programs, Adjust Federal Funds Rate)
• Adjust the Discount rate for non-member commercial banks
• Set Reserve Requirements (more Reserves = less lending)
• Term Deposit Facility
• Overnight Reverse Repurchase Agreement
• Interest on Required and Excess Reserves
• Forward Guidance & Talks (Not an Official Tool)

What Drives the Feds Policies/Actions?

• Inflation measures
• Labor Market (Unemployment,  Job Gains)
• GDP growth
• Housing Starts & Sales
• Interest rates 
• Yield curve

• This was seen as a time when Fed Chairs would intervene (verbally or through policy) if stock markets corrected
  • They appeared to want to keep markets up (although not one of their official mandates
• The market expected the fed to take action if stock markets dropped
• Covered Chairman Ben Bernake's and Janet Yellen's tenures
• Their actions became known as the "Fed Put"
• Became so apparent that newspapers and magazines created cartoons outlining this behavior
• Ended with chairman Jerome Powell, who follows an economy-focused approach

Federal Reserve Transparent Communications

• In the 1980s and earlier the fed provided little communication
• No press conferences or details were provided - just rate changes
• The Primary Dealers got info first by being on the other end of Fed Trades
• Primary Dealers could then share this information with top clients
• Broad market had to guess out policy changes based on market reactions, leaks and rumors
• Fed now communicates aggressively (2018)
• Press Conferences, Detailed Policy Announcements & Statements, Publishes Monthly Meeting Minutes, Economic Forecasts, Interest Rate Dot Plots, Fed Governor Speeches
• Publishes full transcripts of its eight annual meetings with a 5 year lag

How to Interpret What The Fed Says

• The fed does not state something publicly unless it's well researched, vetted and going to happen
• If the fed states that something may occur, it's likely that it will

Federal Reserve Criticisms

• Economic Forecasting has been inaccurate - worse than a coin flip!
• It claims to be independent, but isn't really
•  There are many of examples of where it acted to help current politicians
  
• 1934 Confiscation of gold
• 1940s low interest rates to help US finance WW2
• 1971 end of gold standard under Nixon
• 2008 guarantee of all FDIC bank deposits and money market funds
• Encourages malinvestment when it suppresses interest rates
• Companies invest in plants, assets and equipment that would not be profitable aside for cheap money
• Data it uses has become increasingly unreliable and manipulated over time:
• data overplays growth
• data downplays actual inflation
• data misses structural economic issues
• Ex.  Unemployment is low in 2018, but tens of millions aren't working and are uncounted
• Ex.  Inflation metrics say TVs have gotten cheaper over time due to their better tech.  But in reality they still cost a lot!

2019 Policy Reversal

• Before Jan 2019 the Fed was consistently raising rates and pursing QT (Quantitative Tightening)
• The Fed (Jerome Powell) verbally reversed course in Jan 2019 after credit and stock markets tanked in Dec 2018
• Concern that the Fed started to increase rates and tighten too late in the business cycle - FED actions started to cause a crisis
• Criticism that the Fed started to tighten after creating a bubble in everything:
• Historically high stock market valuations
• Historically low interest rates (and correspondingly high bond prices)
• Historically high debt levels
• Historically high corporate debt levels
• Historically high levels of corporate debt
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