Here's Why the Fed Has No Credibility

Yesterday, Federal Reserve Bank of Dallas President Richard Fisher:

“I would discourage you from thinking that simply because of a significant action in the credit markets, like we had yesterday, that suddenly we’re going to have an Open Market Committee meeting, and that suddenly we’re going to move Fed funds rates in response,” said Fisher. “It doesn’t work that way.”

Today:

The Federal Reserve on Friday announced two initiatives to address heightened liquidity pressures in term funding markets.

First, the amounts outstanding in the Term Auction Facility [TAF] will be increased to $100 billion. The auctions on March 10 and March 24 each will be increased to $50 billion–an increase of $20 billion from the amounts that were announced for these auctions on February 29. The Federal Reserve will increase these auction sizes further if conditions warrant. To provide increased certainty to market participants, the Federal Reserve will continue to conduct TAF auctions for at least the next six months unless evolving market conditions clearly indicate that such auctions are no longer necessary.

Second, beginning today, the Federal Reserve will initiate a series of term repurchase transactions that are expected to cumulate to $100 billion. These transactions will be conducted as 28-day term repurchase [RP] agreements in which primary dealers may elect to deliver as collateral any of the types of securities–Treasury, agency debt, or agency mortgage-backed securities–that are eligible as collateral in conventional open market operations. As with the TAF auction sizes, the Federal Reserve will increase the sizes of these term repo operations if conditions warrant.

The Federal Reserve is in close consultation with foreign central bank counterparts concerning liquidity conditions in markets.

Comments

[Malkiel]

You're point was a little too subtle (or perhaps obviously invalid). Exactly how is the information you presented evidence of a Fed credibility problem?

[Pent up demand]

I think he's saying the Fed doth protest too much against the accusations that they are chasing the news feed. In this case they won't alter the FFT; they will inflate the old-fashioned way. Print money and then distribute via the TAF.

[TenDollarTommy]

As a guy who traded in the fixed income and futures markets at a couple of major NYC firms over the past 25 years I say it's obvious you don't know anyone at the Fed or how they operate in the real market, nor do you know much about how credit markets in general operate. In fact, you don't know that you don't know....

[gb]

Dallas FED guy says they dont watch markets to decide their money printing policy. Today job numbers were bad and to avoid market meltddown, shifted printing press into higer gear. That is why they dont have credibility.
Also during the realestate bubble, Bernanke goes to congress and says realestate market is healthy. When bubble starts bursting, he says it is "well contained". Now that it has spread, priting press is in full force. Nevermind fact that in the first place the problem was caused by the cheap money FED put into the system during Greenspan era and were sleeping to oversee the lending standards. Infact they encouraged those kind lending. Remeber Greenspan encouraging ARM loans. Yep. These are credible people.

[fjd10595]

The point was not to subtle, it was obvious. The fed spokesman stated, in effect, "don't expect us to turn on a dime", Then, the very next day, they "turn on a dime". Get it.

[historian]

As my name implies, I am not an economist but I am a realtor in PA. I believe that the we would be better off if the FED raised the rates simply because I have seen the oil prices go up when the FED does this. I am also not real thrilled with the new plan for FHA
As to the printing of money, wasn't there a big tall guy by the name of Volker who said that one of our biggest problems was printing to damn much money?

[goatfarmer]

Whatever the point was we shouldn't have to guess at it. The editors of this site should be stricter in publishing such unfinished work.

[GaryD]

Goatfarmer, it is a pretty obvious point. One day ago a fed rep said that they would not respond in a knee-jerk action to market news, and then today they responded in a knee jerk action to market news. This is not hard to understand, and is a valid and important point.

TenDollarTommy must be a fed employee. The entire posting is simply two quotes from the federal reserve, and based on that he claims that the poster does not know anything about credit markets or the fed. Only a fed employee could be so obnoxious.

[bhakta]

The FED is following Ben's formula to avoid deflation at all costs. He studied extensively the history of Japan after 1988 and hopes he can prevent the same scenario in the USA.

[spragus]

The FED's response was not knee-jerk. It was in response to the seizing up of credit markets of the past 2 weeks. Take a look at what's happened to credit spreads.

[fjd10595]

To Spargus, then the Fed spokesman should not have made the statement that they made the previous day, "don't expect...." I think we have wasted enough time on this issue. Sufficient to say that Bernake inherited a decade of mismanagement of fiscal and monetary policy. And the George Bush 2 administration has been the most reckless in history.

[gordon]

The author's point was obvious. The Fed knew the job number and announced the $100 billion (or is it $200 billion?)repo -giveaway BEFORE IT'S RELEASE . Get it? They are exchanging all the sub-prime garbage now not for 7 days, BUT FOR 28 DAYS, and they will roll over (renew)these swaps until the total gov't bailout of mortgages happens.
A fund manager was on Bloomberg tv yesterday and said the Fed Governors should shut up until they have a unified opinion, their "going it alone" is crushing market confidence.

[cheesecake]

the fed is chasing the market and the sad part is that they can do very little. so far only approx 100-150 billion of losses have occured from marking assets to market, and conservatively another 100-200 billion are going to come online over the next 3 months.

[ezduzit]

i'm not a financial genius but i believe the fault causing the crisis was not 1% or 2% interest rates (ala greenspan) but institutions offering those loans to people who were not qualified to buy those homes, even if they lived there for free. and also throw the appraisers into that pot.

[Whidbey]

The article points to the problem, regardless of how the Fed acts. What we must worry over is not the Fed ( aside for sentiment, the lags in effects make Fed policy largely irrelevant for 6-12 months). But the Congress is considering tampering with terms of debt. Such actions will be immediately destructive.

The hazard is Congress, not the Fed. Proposed action will end the credibility of debt instruments, freeze the debt market, and crush the dollar. That matters greatly.

[swaps]

How can anyone on this board even assert that the Fed has credibility..or competence. I will not waste my time attacking the detractors of this post, but about 25 years ago when Malcolm Forbes Jr. was in charge of Forbes the magazine viciously pointed out that the Fed is constantly destabilizing markets by first accelerating money supply beyond its need, then hitting the brake, thus erring on the down side as well.
No matter how many times guys in $2,000 suits tell CNBC audience that the Fed is an inflation fighter, we all have to live with the reality that the value of a dollar in 1913, when the Fed was imposed on us, had dropped to a nickle. Some inflation fighter. And don't argue that deficit government spending causes inflation because the Keynesians couldn't do their deficit spending thing if the monetary side did not accommodate them.
This latest chapter is just one more example of why The Fed must go out of business.

[Ames Tiedeman]

The Fed has no credibility because lower rates this time will fix nothing. Housing is the issue. Lower rates will not bail us out of this mess. More liquidity will only prolong the coming pain. Real estate in places like Boston, Miami, and San Diego is finished for years to come. Texas is the bargain and the future bright spot.

[noguru]

If you want confidence in the market why does the US government announce the opening of its oil reserves and drive the price of oil and other commodities down. That would be a better shock to the system than another rate cut to drive up commodities. All this cheap money is not ending up with the homeowner its ending up in commodities.

[1lobo51]

The Fed Res. is the cause of this problem with its easy money policy under Greenspan. When money was made cheap and available everyone came out to borrow short and lend long and the bandits came out and these include uncrupulous mortgage lenders, appraisers, creaters of CDOs,MBSs and other derivitives within which there was great mystery. Some plumbed so deep they can't find the original mortgage papers. Put the blame where it belongs, right on Greenspan and now on Bernanke. I was getting 5% on treas. 6 months ago and now 2% or less. Fiddling with interest rate stiffs us old geezers who do not wish to play craps in the markets.

[blah-blah]

Lame,

This current problem is all Greenspan's fault - he was laughing as he left a bomb in Bernanke's lap on his way out.

[warren mosler]

The Fed's action might be signalling they are now responding other than with a rate cut, due to concerns about inflation. Not too many weeks ago the credit issues seen last week along with the equity market weakness would have meant a rate cut.

Also note that the fed still doesn't full grasp monetary operations, or they would simply be setting the 'price' (interest rate) for the TAF and letting the quantity float. The quantity of TAF funding or any other open market operations functionally has nothing to do with 'money supply' in any economic sense.

[cyberman]

The article was about liquidity. My question is where will liquidity be in 6 months? Will the TAF increase and the repurchase transactions together be on target so as to unfreeze the credit markets sufficiently or not? Choose your comparison model. Interest rates, housing, employment, spreads, inflation, DJIA, or...? What will be accomplished? Do they "know nothing?"

[spragus]

to fjd10595; one of the problems is that there has been too much fedspeak. They all seem to be staking out territory and need to be reined in. Besides, with rates at 3%, there's clearly less room to the downside than before. He was just (unnecessarily) stating the obvious. This is a good example of "less is more".