The Nattering Naybobs Of Normalization (A Tale Of 3 Fed Heads)
By Tyler Durden
Authored by Bill Bonner of Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),
Leaning Into the Wind
During our lifetime, three Fed chiefs have faced a similar challenge.
Each occupied the chairman’s seat at a time when “normalization” of interest rates was in order.
Recently, we remembered William McChesney Martin, head of the U.S. Fed under the Truman, Eisenhower, Kennedy, Johnson, and Nixon administrations. Today, we compare Martin with two of his successors, Mr. Paul Volcker and Ms. Janet Yellen. We allow you to draw your own conclusion.
Punchbowl theft alert!
In 1951, the Fed and the Treasury clashed over “normalizing” interest rate policy after almost 10 years of tight control. In 1942, after the U.S. entered World War II, and at the request of the Treasury, the Fed pegged interest rates at a low level to make it easier for the government to finance the war. Come peacetime, it had to finesse a return to market-set rates.
Of course, the Fed can never fully shirk its responsibilities or ignore its influence. Its voting committee, the Federal Open Market Committee (FOMC), has the ultimate say on setting short-term rates. But its hand on the controls can be heavy… or light. It can allow the market to express itself. Or it can shut the market up and do the talking itself.
After the troops came home, Martin developed two metaphors to describe his views on central banking. The first was that the central bank should neither set rates high nor low, but instead “lean into the wind.” The idea was to moderate market forces by exerting a little counter-cyclical pressure.
If the economy were running hot, the central bank would maintain its funds rate a little higher than usual. If the economy were cooling off, it would aim for a slightly lower rate. That brings us to the second of Martin’s metaphors.
The job of the Fed, he said, was to “take away the punch bowl just as the party gets going.” In other words, raise interest rates just when the economy starts to enter an unsustainable boom.
Times Change
Mr. Martin was not necessarily less intelligent than those who succeeded him. But times change. Fashions evolve. Today, Truman’s appointee as Fed chief might as well be wearing spats.
In February 1951, the annual consumer price index, or CPI – the most common measure of inflation – was running at almost 8% a year. President Truman summoned the entire FOMC to the White House – with Martin as the principal negotiator – to extract a pledge from them to keep interest rates pegged at low levels.
But the Fed dug its heels in and refused to “maintain the existing situation.” Martin then announced that he would allow interest rates to rise. And rise they did. From just under 1% when Martin took over as Fed chief, short-term rates stood at almost 4% at the start of the 1960s.
Frontal Assault
The next …read more
Source: The Nattering Naybobs Of Normalization (A Tale Of 3 Fed Heads)
