When I entered the Fed-watching business over three decades ago, a clichd phrase of advice from graybeards was: ‘Watch what they do, not what they say.’ Thinking back, there was not actually much Fed rhetoric to either watch or hear.
Paul Volcker was new in the job of Fed Chairman, Ronald Reagan had just been elected President, and Ted Turner had not yet launched CNN Headline News. All three men are now recognized as giants of transformative change in America’s life, altering not just how we conduct our affairs, but also how we think about ourselves.
It really was a good time to be a newly minted graduate in short pants on Wall Street. The fiscal authority was pursuing something called supply side economics and the monetary authority was putatively pursuing monetarism. Keynes was in rehab for inflationary intoxication, and Friedman was the straw stirring the free-to-choose drink. The visible fist of government was cursed and the invisible hand of markets celebrated.
Ah, yes, a most interesting time to start a career on Wall Street: a time of existential ferment in our nation’s economic policy, best characterized by tight monetary policy, loose fiscal policy and blind belief in the ability and willingness of capitalists to regulate and discipline their own affairs. At such a juncture in history, the advice of the graybeards to me to watch what ‘they’ do rather than what they say was sage counsel.
This was particularly the case in watching the Volcker-led Fed, which pegged short-term interest rates, but said it didn’t, maintaining that it simply controlled growth in the money stock via changes in ‘the degree of pressure on bank reserve positions.’ Volcker also thundered that the Fed had virtually no influence over long-term interest rates, which were putatively sky high because of outsized budget deficits and inflationary expectations.
This post was published at Zero Hedge on 09/12/2014.