Fed up with Fed Talk: Central Banking Fairy Tales and Facts!

Summary

In this session, the speaker critiques the widespread belief in the Federal Reserve's (FED) omnipotent influence over interest rates and the stock market. They debunk four common myths: that the FED sets all interest rates, leads market rates, signals economic health, and controls stock prices. Through historical data analysis, the speaker argues that market and institutional rates are not set by the FED, and its actions have little correlation with market outcomes. The talk concludes with a call to focus on real economic issues rather than the perceived power of the FED.

Takeaways

• 📉 The speaker expresses skepticism about the Federal Reserve's (FED) influence on interest rates and stock prices, considering it one of their least favorite topics.
• 🏦 The FED only directly sets one interest rate, the Federal funds rate, which is an overnight intra-bank borrowing rate and not directly relevant to consumer rates.
• 📈 Market-based rates, such as US Treasury rates and corporate bond rates, are set by market demand and supply and are more volatile than the Federal funds rate.
• 🏢 Institutionally set rates, like mortgage rates and credit card rates, are determined by financial institutions and are not indexed to the Federal funds rate.
• ⏳ Historical data shows that changes in the Federal funds rate do not consistently lead to changes in other market or institutional rates.
• 📊 The speaker argues that broader economic factors like inflation and real GDP growth are more significant drivers of interest rates than FED actions.
• 📉 The belief that the FED is a 'market whisperer' influencing stock prices is challenged, with data suggesting little correlation between FED rate changes and subsequent stock market performance.
• 🔍 The FED's signaling of economic conditions can be interpreted in multiple ways, leading to confusion rather than clear guidance for investors.
• 🐓 The speaker uses the fable of 'Chanticleer' to illustrate the FED's perceived influence as a delusion, similar to the rooster thinking his crowing makes the sun rise.
• 🚫 The speaker concludes by advocating for a shift in focus away from FED actions and towards more pressing economic issues, criticizing the 'FED delusion' as a distraction.

Q & A

Why is the speaker critical of the Federal Reserve's influence on interest rates?

The speaker is critical because they believe that the Federal Reserve does not directly set the interest rates that consumers and businesses encounter daily, and that the perception of the Fed's influence is exaggerated.

What is the Fed funds rate and why does the speaker claim it's not relevant to most consumers?

The Fed funds rate is an overnight interbank borrowing rate set by banks lending to each other. The speaker argues it's not relevant to consumers because it's not something they encounter in their daily financial activities, and other rates are not indexed to it.

How does the speaker refute the idea that the Fed leads the market in setting interest rates?

The speaker presents historical data showing that changes in the Fed funds rate do not consistently precede changes in other market interest rates, suggesting that the Fed is not a leader in this regard.

What is the 'Fed delusion' mentioned in the script?

The 'Fed delusion' refers to the widespread belief that the Federal Reserve has significant control over interest rates and market movements, which the speaker argues is a misconception.

Why does the speaker suggest that the Fed's signaling of economic conditions is murky?

The speaker suggests that the Fed's signaling is murky because the Fed's actions can be interpreted in multiple ways, such as a response to inflation, economic slowdown, or political influences, making it difficult to discern a clear signal.

What historical example does the speaker use to illustrate the myth of the Fed's influence?

The speaker uses the ancient fable of the rooster Chanticleer, who was believed to cause the sun to rise with his crowing, to illustrate how the Fed's actions are often wrongly seen as the cause of economic changes.

How does the speaker evaluate the Fed's role during economic crises?

The speaker acknowledges that the Fed can play a significant role during economic crises, citing the 2020 COVID-19 crisis as an example where the Fed's actions helped stabilize markets.

What does the speaker propose as the real drivers of interest rates, instead of the Fed's actions?

The speaker proposes that expected inflation and real GDP growth are the real drivers of interest rates, rather than the Fed's actions, which he suggests have a marginal influence at best.

Why does the speaker argue that the Fed's influence on stock market performance is overestimated?

The speaker argues that the Fed's influence is overestimated because historical data shows no consistent correlation between changes in the Fed funds rate and subsequent stock market performance.

What is the speaker's conclusion about the role of the Federal Reserve in the economy?

The speaker concludes that the Federal Reserve's role in setting interest rates and influencing the economy is often overstated and that focusing on the Fed distracts from addressing real economic issues.