Greenspan: 100 Days To Go - And Then?

Sunday, October 23, 2005

Today is a remarkable day as it is the beginning of Fed chairman Alan Greenspan's last 100 days before he will hand over the helm to his yet unknown successor. Since I have covered his most likely successors in the post "AP Boils Down Greenspan Succession to 3 Names" - a list that since then got enriched with names like Treasury Secretary John Snow (OhMyGod), Fed governor Donald Kohn (my personal favourite) and the idea that the acting administration will pick some superbull from Wall Street and I had also covered the topic "Will Greenspan Lose His Wreath Of Honour Before He Retires?" I want to focus on a matter that has been worrying me for quite a while. Worrying me so much that I started writing this post a 3 AM local (Vienna) time.
Crediting the Maestro with the longest peacetime expansion of the US and with it the global economy I nevertheless notice a remarkable difference between his style at the Fed and that of the (young) European Central Bank (ECB) and other western central banks. The difference lies in terms of accessibility. After every council meeting of the ECB its acting president braves some 60 to 90 minutes of questioning by the Euro-international press corps.
Whereas the quality of the questions at these once-a-month events can be discussed at length - I feel tempted to use Brad DeLong's multiple headline "Why Oh Why Can't We Have a Better Press Corps?" - this is only of secondary interest to me in this post. I will do that after the next ECB press conference - or one of the next ones.
Soviet style
I rather want to focus about the big distance the Federal Reserve Board (FRB) puts between itself and the rest of the world. While the chairman, the governors and the regional Fed presidents can be seen quite frequently behind a standing desk, delivering a speech - and quite many of them in the recent past - that mostly leave the impression they are out there to calm the markets it is notable that the high priests of ever expanding credit are quite reluctant to go into a Q&A session afterwards and in 99% percent of cases walk off without leaving any opportunity to second question their announcements.
While this can at least happen sometimes, mostly in the case when they can expect a tame auditorium that will not delve deeper into monetary policy, I am missing an important event in the agenda of the Fed. That is press conferences. Googling "Federal Reserve press conference" the first reference dates back to September 16, 1999 when FRB member Edward W. Kelley explained the steps the Fed would be taking to avoid a Y2K data disaster at the National Press Club.
But since then? No interviews, no press conferences. The last authority that has been so distanced from the people whose lives it influences has been the government of the USSR. We all know how that ended.
The legal status of the Fed has been a hotly discussed talking point since its inception I wonder why this institution whose decisions influence directly and indirectly every citizen of this world is so reluctant to do what every other public body - yes, I know this is disputed too - does. That is, giving account to the representatives of the public, the media.
We all would consider it very arrogant when our political representatives would take the same stance, shielding themselves behind a few press releases and two annual visits to Capitol hill where Greenspan shows off his immense knowledge with answers to asking politicians that only leave them room for a deep breathe, but no follow-up questions as they have visibly been confused by "Greenspeak."
But other than that the most important person in monetary policy on this globe is inaccessible to the rest of us mere mortals, even to the third power in a democracy; the media (and I would love to see bloggers included who could add a lot of expertise to any media event.)
The Fed is quite good at stressing the point that it acts as transparent as possible. But they are even better at hiding from questions concerning the Exchange Stabilization Fund (ESF), the actions of the "Working Group on Financial Markets" (see the post "Money Firm Claims Wall Street Is Rigged By The Government") and its operations in bond and equity markets.
Having covered the German Bundesbank as a journalist a decade ago I still remember the immediate buzz in the newsroom when the German watchdog of price stability was reported to inquire the dollar rate with the major players in the market.
Where is the balance sheet?
You don't see such events happening with the Fed. Nor does one see an audited annual report of the Federal Reserve either. Yes, they publish an annual report to Congress that covers the economy and such issues as the management and value of their real estate and their outlays for research and salaries - which rose significantly more than the official inflation rate in 2004 - but I am missing one thing required from every shopkeeper in the world. Call it balance sheet.
While the acting administration in the White House announced last week that it will name Greenspan's successor by mid-November I doubt that the Bush-crony to step into the shoes of Alan Greenspan will change this style. No administration in the young history of the US has added more layers of secrecy than this one.
Seeing the success of their political interventions I think they have every reason to hide as much from the public as possible.
But don't worry, I have the strong feeling that this government will not get away unscathed. Thank whoever that we live in a time where the truth finds its way on the internet by pictures and writings. The Abu Ghraib and Guantanamo scandals only came to our knowledge this way and it will not be the last scandals that will find their way into the public.
As I begin to stray away from my original issue of this post, muttering about a US international policy that offends people on several continents, let's get back to Greenspan's last 100 days.
While we can safely assume that the Fed will continue its 25 basis point steps until January 31 last week's speech of San Francisco Fed president Janet Yellen raised the issue that the "neutral zone" of the Fed Funds rate might extend as far as 5.5 %. Inflation will come at a cost to the happy spenders in the White House as every Fed move raises their bill in terms of interest payments on new debts which are currently generated to the tune of $3 billion per day. The IMF also prescribes higher interest rates for the US while it recommends to the ECB to stand pat (US jargon)/ stay put (UK jargon), its chief Rodrigo de Rato said on Friday.
The IMF is quite open to the public in terms of interviews and press conferences although its policies are highly disputed around the world.
Markets Price In Higher Inflation
Markets are beginning to price in their future expectations of higher inflation. The 10-year Treasury yield has risen to 4.50% from under 4% less than three months ago. Equity markets are beginning to test the lower ends of this year's trading ranges and I am expecting a titanic fight once the Dow comes into the 10,000-point area, a region where it magically bounced off on April 20, 2005. Please note that Fed Funds were 100 basis points lower then (and maybe read the post "No Matter What Happens, Wall Street Does Not Go Down which will lead you to a myriad of other interesting blogposts.)

Fed Funds vs. S&P 500 from 1950 to 2005

GRAPH: There has been no period in history where equity markets did not move inversely to interest rate levels. We may see some delay in this process as it is currently the case, but history shows that there is no exception from this rule. Data:
The Fed is fully aware that any word it utters to the public may bear the fate to become the initial point of market disturbances, as the research paper "Transmission of Information Across International Equity Markets" (pdf) from Jon Wongswan from February 2003 concludes. Remembering the more recent past they have also been doing a good job at discreetly hinting that upcoming macroeconomic data might be different from consensus expectations. A lesson Fed researchers Jon Faust; John H. Rogers; Shing-Yi B. Wang and Jonathan H. Wright have scientifically proven in the Fed paper "The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements" (pdf) in October 2003. But one wonders whether the current ping-pong of Fed speakers who hover between cautious remarks and optimism on a weekly basis by now will not exactly lead to the event they wish to avoid at all costs: A market move like those in October 1929, 1987 and 1989 and the extended slide in the year 2000.
Problems Only Aggravate By Staying Silent On Them
Reading these papers I understand that the Fed is very cautious about what it says on the record. But from my past times as a journalist I have learned that a public body only aggravates problems by stying silent on pressing problems. And we are facing a lot more problems today than the Y2K issue was back before the new millennium. Fed Vice Chairman Roger Ferguson has acknowledged the globalization process and its implications for public policy as well in his speech "Globalization: Evidence and Policy Implications" from May 2005, saying, "policymakers should and do pay attention to globalization." Not that he drew any conclusions for the Fed itself, though.
To speculate whether the next Fed chairman will be more accessible makes no sense before we know who it will be. But it would be a welcome move if he would open up himself to a Q&A sessions once in a while. As the world has become a more transparent place the Fed should become the same too.


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