Decoding the Fed

Six Bears
Repo Weirdness
“Ample Supply”
Seven Deadly Sins
New York, Houston?, Philadelphia?, And…?

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

Frédéric Bastiat, “That Which Is Seen and That Which Is Unseen,” 1850 (JM’s emphasis)

You may have noticed strange events in Washington, DC—strange even by today’s standards—and I don’t mean the White House or Capitol Hill. I’m talking about Federal Reserve policy.

In less than 12 months we have seen the Fed raise rates, cut rates, shrink its balance sheet, expand its balance sheet, inject liquidity, withdraw liquidity, and do who knows what else behind the scenes. Either Fed officials are confused or we are at some kind of economic turning point. Or possibly both—there is no playbook. At a minimum, I think we are at a turning point and the Fed is having to improvise policy as events dictate.

Observing all this, it’s easy to fixate on the present and forget what led to it, those “seen and unseen” effects Bastiat described. At times like this, it helps to take a step back and review the process that got us here. Today we’ll do that, considering the latest Fed activity in longer context.

That’s what the Fed does, after all, and understanding them may be easier if we try to think like them.

First, a small request. I am trying to learn more about the Japanese pharmaceutical sector and regulations and in particular looking for a potential biotechnology partner. I will be eternally grateful to any readers with contacts at senior level management who would be willing to make an introduction. If that’s you, drop me a note here. Many thanks.