The Fed Matters Much Less Than You Think

thenews 2013.08.01 18:41

Those who follow the mainstream media’s “all Federal Reserve, all the time” coverage of financial news naturally conclude that Senator Chuck Schumer neatly summarized reality last year when he declared that the Federal Reserve “is the only game in town.” This obsessive focus on Federal Reserve policies and pronouncements has several causes, including

laziness; i.e., publishing press releases and official spin as “news”
willful ignorance
craven desire to tout the party line, lest the plumage of someone higher up become ruffled and the messengers be sent to the career guillotine
adolescent faith in an all-powerful financial Deity (the Federal Reserve) being far less troubling than skepticism, and
all the other lemmings are persuasively running in that direction, so it must be right

This lemming-like belief in the power of the Federal Reserve generates its own psychological force field, of course; the actual power of the Fed is superseded by the belief in its power. The widespread belief in the Fed’s omnipotence is the source of the Fed’s power to move markets.

We can thus anticipate widespread disbelief at the discovery that the Fed is either irrelevant or an impediment to the non-asset-bubble parts of the economy.

Once ensconced in the comfort of the Fed Cargo Cult, it’s easy to believe that the Fed-inflated asset bubbles in stocks, bonds, and real estate are either the most important sectors of the economy, or they accurately reflect the real economy.

But if we emerge from the dark hut of the Fed Cargo Cult into the bright sun of reality, we find that everything that really matters in the real (i.e., non-Wall-Street) economy is outside the control of the Fed.

What the Fed Does Control

For context, let’s recall what the Fed actually does control:

The Fed controls the Fed Funds Rate; i.e., the lending rate between banks.
The Fed can influence interest rates in the real economy by buying and selling Treasury bonds and other securities; i.e., increasing or decreasing liquidity/money supply.
The Fed can make funds available to the financial sector. During the 2008 Global Financial Crisis, the Fed loaned over $16 trillion to large global banks. This is roughly equal to the entire gross domestic product (GDP) of the U.S.; all residential mortgages in the U.S. total about $9.4 trillion.