I can plow a field all day long,
I can catch catfish from dusk til dawn.
Make our own whiskey and our own smoke too
Ain't too many things these boys can't do.
We grow good old tomatoes and homemade wine
And countryboy can survive, country folk can survive.
-Hank Williams, Jr.
Hank's contention that "country folk" can adjust to their
surroundings and survive without the trappings of normalcy applies
now to the Federal Reserve (as well as the Treasury). After last
week's reduction of the Fed funds rate from a targeted level of one
percent to a range of zero to 0.25 percent, the Fed will have to
use other tools to continue encouraging confidence and risk taking
in the marketplace.
Combing through the statement after its release
last Tuesday, I found the following
First, the Federal Open Market Committee's decision to use a
"range" instead of a specific number tells me they have all but
given up on pinpointing the rate. A closer look at the data reveals
that this has been the case for some time. For the ten years ended
June 2007, the difference between the actual Fed Funds rate and the
targeted rate averaged just two basis points. Since June 2007 the
difference has averaged 36 basis points.
Because the market activity that sets the actual Fed funds rate is
dominated by non-Fed transactions, it's clear the inmates are
running the asylum today. In fact, if the Fed had its way, my guess
is that the rate (and the target) would still be at one percent.
Last week's cut was only a reaction to the level Fed funds were
already trading rather than a proactive move to drop bank borrowing
Second, the release stated, "The Federal Reserve will employ all
available tools to promote the resumption of sustainable economic
growth and to preserve price stability." The eye-catching phrase is
"all available tools." If the recent spate of four-letter
government bailout programs weren't enough to convince us, the Fed
has now stated publicly in the most visible forum possible that
they are implementing every possible program to help market
participants and consumers regain confidence in the system. We
should not be surprised to see a multitude of additional programs
introduced throughout the first quarter.
Third, the committee clarified their goal of supporting the
"functioning" of the markets. Many pundits misinterpret their
actions as "creating stimulus" or "boosting activity." While these
are surely goals, the problems in the markets have taken us beyond
stimulus and we are now at a point where simply "functioning"
markets would make us happy. For those hoping for a quick fix to
the economy and an immediate return to sustainable three percent
GDP growth, this should be sobering news.
Fourth, the Fed made clear their intention to directly purchase
"large quantities" of agency debt and mortgage-backed securities in
order to support the housing market. With job losses going
parabolic, the Fed realizes they are out of time to get the housing
market back on track and are now directly investing real money into
The bottom line is that the Fed funds rate is dead. No longer can
we look to lower interest rates to provide the boost we need in the
economy. The Fed will have to implement a multitude of other
programs to help support the economy. This is the definition of
"quantitative easing" or QE, a topic we will all learn more about
as the Fed navigates through 2009. Weekly Review
Federal Reserve action dominated the headlines last week as the
FOMC cut the Fed Funds target rate from one percent to a range of
zero to 0.25 percent. Additionally, the accompanying statement said
the Fed "will employ all available tools to promote the resumption
of sustainable economic growth and to preserve price stability."
Overall consumer prices dropped 1.7 percent in November due
primarily to the recent drop in energy prices. Stripping away the
volatile food and energy components, consumer prices were flat on
the month. Though some are speaking of possible sustained
deflation, this is difficult to foresee given the amount of
stimulus that has recently entered the economy.
Jobless claims for the week ended December 13 fell slightly to
554,000; however, the underlying upward trend remains in place.
Coming automotive layoffs along with massive financial sector
layoffs will drive employment down in the first quarter, possibly
with contagion effects to the housing market and the consumer.