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Greenspan and Fed not to blame | |||
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By DAVID MOON, Moon Capital Management We are a nation obsessed with the Federal Reserve Board. It is one of the few bipartisan (or "a-partisan") entities remaining in society. And at its helm is a 77-year-old former Juilliard music student with the aura of a rock star. Alan Greenspan frequently receives criticism for his actions, accusing him of being a power hungry, government activist. But he did not originally seek the status and power he now holds. He turned down an offer to work in the Nixon White House. At various times in his career, he has argued for the abolition of all anti-trust legislation, a return to the gold standard, the "sun-setting" of all federal financial regulations and the elimination of government meddling in the financial markets. He was a confidant of Ayn Rand, this century's literary guru for a hands-off government policy. So how did this laissez faire student become one of the most powerful men in the financial markets? By understanding the role of expectations on the financial markets, not by superior manipulation of interest rates. When the Federal Reserve Board announced a cut in the target for the Fed Funds rate on June 24, the general level of interest rates increased in reaction. Traders said the market was disappointed the Fed cut was only a quarter of a point. Commentators dissected the Fed's comments, surmising that Greenspan, et al, were concerned about the prospect of deflation, a relatively unknown phenomenon in this country. All Greenspan was doing was trying to manage the expectations of the financial market. In 1996, why did Greenspan comment on the "irrational exuberance" of stock prices? The Fed has no mandate to stabilize the stock market. But Greenspan is smart enough to know that unrealistic market expectations create all sorts of instability ' not just among stock prices. Greenspan also knows the investment community overanalyzes every word he utters in public. The Federal Reserve Board is irrelevant to many market interest rates. The Fed could go into the open market and directly buy or sell securities; this would have an impact on the rates of the bonds they bought. If the Fed wanted to decrease 30-year Treasury rates, it could go in the market and buy billions of dollars of thirty-year Treasuries, driving their yields lower. But it hasn't done that. Instead, the Fed has, to date, limited its actions to influencing only the rates banks charge each other on overnight loans - and only after the free market already pushed short-term rates into a new low territory. Want to know if the Fed is likely to increase rates at its next meeting? See if short-term rates have been increasing prior to the meeting. The Fed has generally been a follower, a 'confirmer', of sorts. Many investors (particularly those relying on interest income from bonds and CDs) berate Greenspan for driving rates to their lowest levels in almost 50 years. But the Federal Reserve didn't do that; the market did. That's the only way Greenspan would have it. David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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