Federal Reserve & My Thoughts

Did you know that one of the most powerful people at the Federal Reserve is the Chairman’s Chief of Staff, The position has an almost Versaille-esque control of the staffers and aides available to the committee members which helps the Chairman steer the message and maintain discipline. This may be the most powerful unelected and somewhat unaccountable bureaucrat in the entire United States government.

Versailles, of course, was created by the Bourbon Dynasty to keep the French nobility under a close and watchful eye. The entertaining and glamorous aspects of this were in service of this more sinister objective to consolidate power and were key to Louis XIV’s supremacy. The strategy is a favorite of the powerful, sort of like how Big Tech is Sweeping Up any knowledgeable Hill Staffers in anticipation of a bipartisan gauntlet coming down.

Another lesser-known issue with the Fed has happened slowly as the discipline of academic economics became more and more immersed with Wall Street. This Wall Street-ization of the Fed and homogeneity of backgrounds amongst top officials was never supposed to be how the Fed was composed. In fact, the original vision was supposed to have someone who specializes in each region’s economy to give the body a more democratic flavor. Should The New York Fed be headed by someone from Wall Street with a background in academic economics? Sure.

However, the Philadelphia Bank should probably have a manufacturing specialist. Dallas? Well, someone well-versed in a real-economy Energy industry background may be ideal. To a certain extent this distinction is still honored, but much less so than in the past. We believe the specialization and dissent at the regional level was a key part of the original vision for the Central Bank and should be bolstered through statute potentially.

All eyes are on the Federal Reserve’s coming November meeting when many observers expect the body to begin the long-awaited, and some would say dreaded tapering process. We’d like to remind you that tapering is the slowing of accommodative asset purchases in Treasuries and Mortgage-Backed Securities (MBS) and not the beginning of tightening. This is a crucial distinction, and you can’t say Powell hasn’t tried to prepare markets.

The Fed Chairman that never was, Mr. Larry Summers seems to be developing a new fanbase. You got to pay attention to followers and clicks these days, eh? They did join the Central Bank Network for indigenous Inclusion on 10/13, but we think this is positive and probably makes sense for a government agency.

The FOMC meeting will be on November 2-3/2021 and based on commentary from the last meeting and the recent upside surprise on economic data and earnings should help the committee stick to the tentative schedule. However, the body acknowledges that inflation has been persistently high, and it will have to act if it does not peter out. When tapering begins expecting the Greek Chorus of Fed watchers to shift their laser focus onto the timeline of interest rate “liftoff.”

One key area of uncertainty remains even though some FOMC members have dismissed it. If rising rents and house prices start affecting core measures, a two-speed- taper with the reduction of MBS occurring faster than treasuries is still a potential outcome.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries, although probably not for long. Tapering is expected to begin in November. The benchmark yield on the 10-year settled down a bit from last week at 1.574%.