Is the Fed Now Dysfunctional Too?

Tim Iacono * Gold Seek

A frightening prospect has developed in just the last week, that is, since the Federal Reserve surprised nearly everyone by announcing it would leave its $85 billion per month money printing effort intact: the nation’s central bank might now be as dysfunctional as Congress.

Well, maybe not quite that dysfunctional, but headed in that direction.

Markets expected at least a token reduction in the Fed’s asset purchase program, if for no other reason than that this policy seems to be inflating asset bubbles and doing the real economy little good.

But, after making some bold pronouncements about “tapering” its bond purchases in the spring and saying little to dissuade anyone from that view over the summer, the Fed surprised markets by taking no action, raising more questions than it answered in their policy statement and during a press conference with Fed Chief Ben Bernanke last Wednesday.

Markets had already “priced in” a $10-$15 billion scale back and, unless no one at the Fed reads the financial news, they knew it at the central bank.

Yet, they went ahead and did what few economists expected and what virtually no market participants thought was coming.

Kansas City Fed Chief Esther George put it best on Friday when she noted, “Costly steps had been taken to begin to prepare markets for an adjustment in the pace of asset purchase. This week’s decision by the Fed to taper expectations and not bond buying surprised many and disappointed some like me.”

Combine this with comments from St. Louis Fed President James Bullard who said, “I’m a little dismayed at those in markets that are saying they’re surprised by this. If the economy was going to improve in the second half of the year, and if we saw that improvement, we would taper” and it’s easy to come away with the impression that the Fed is tone deaf with a lame duck leader who could care less about markets.

In short, dysfunctional, like Congress.

One theory for their non-action last week was that Fed doves were emboldened when Larry Summers pulled out of the running for Fed Chairman. By all accounts, he would have been far more hawkish than the policy committee as a whole and he would not have been a popular choice within the Fed, so, maybe uber-dove Fed Vice-Chair Janet Yellen (Bernanke’s presumed successor) is already calling the shots.

As for Bernanke, he is clearly a “short-timer” now and, after eight years, he’s starting to look as though he just doesn’t care much any more, a feeling that is understandable as he counts down the days until his term ends on January 31st.

That’s the way it came off last week in his apathetic response to how markets and analysts reacted to the Fed’s non-decision. This exacerbated what is now seen as a serious communication problem that alienated none other than the Fed’s very own “mouthpiece”, Jon Hilsenrath at the Wall Street Journal, as is clear to see in this story on Friday.

It should be obvious by now that, while printing money may stop an economy from collapsing, it does little to foster sustainable growth and only worsens one of the fastest growing problems in the U.S. economy – income and wealth inequality. As countless data have shown in recent years, Fed policy has greatly helped the rich, but the poor struggle.

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