Tags: Ivanovitch | Fed | stimulus | job

MSI Global's Ivanovitch: Fed's Failure to Be Revealed By New Job Description

Wednesday, 28 Aug 2013 08:00 AM

By Michelle Smith

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The Federal Reserve may not admit its stimulus programs failed, but a change in the central bank's mission will reveal the truth.

It's unlikely that the Fed will agree that spending the past two years adding $745 billion to its $3.4 trillion balance sheet was "an ill-advised fools' errand," writes Michael Ivanovitch, president of economic research firm MSI Global, in a guest blog for CNBC.

Some Fed officials will even try to paint its stimulus efforts as successful. But observers may realize the Fed also is not defining the word "successful" in terms of any particular achievement in the realm of real economy, Ivanovitch says.

Editor’s Note:
Will This Video Get Obama Fired? See the Evidence.

The Federal Reserve is spending $85 billion a month buying long-term bonds and mortgage-backed securities, a decision that followed the unimpressive results of its near-zero interest rate policy. But Ivanovitch notes many of the nation's economic indicators are weaker now than in 2011, when Operation Twist started.

For example, gross domestic product (GDP) was growing at an annual rate of 1.7 percent, since the spring of 2011 and private consumption was advancing at a rate of 2.6 percent.

That compares with GDP growth of 1.3 percent and private consumption growth of 1.8 percent in the first half of 2013.

And the interest rates that the Fed was supposed to be holding down are also on the rise.

Last Friday, the 30-year mortgage rate was 4.78 percent, nearly 30 basis points higher than in mid-May, Ivanovitch notes.

Many market participants blame clumsy communication for sinking bond prices and rising yields.

When Fed Chairman Ben Bernanke finishes his term in January, a key legacy will be oversight of a more talkative Fed, CNNMoney reports.

The Fed's goal with all of its chattiness was to improve transparency and help investors gain clarity. But many point to recent market volatility and criticize central bankers for increasing the confusion.

"The communications policy is new and they're still getting the kinks out," Susan Collin, dean of the University of Michigan's Gerald R. Ford School of Public Policy, tells CNNMoney.

But according to Ivanovitch, communication is not the problem.

"Bond market vigilantes have been anticipating the Fed's retreat ever since the middle of last November, when the yield on the 10-year Treasury note bottomed out at 1.59 percent," he argues.

"Clearly, the Fed could not hold down, much less reverse, changes in the term structure of interest rates unleashed by the constellation of recovering employment, household incomes and low mortgage costs," he adds.

Ivanovitch claims that the sub-prime crisis and its sequels were caused by prolonged and excessively loose monetary policies. And he says President Obama knows the United States cannot keep moving from one economic crisis to the next.

While many are focused on who will replace Bernanke, Ivanovitch says people should be carefully listening to the president's job description for the next Fed chair.

"President Obama understands that the dollar is doomed unless the U.S. can provide the world with a stable transactions currency and a reliable store of value," writes Ivanovitch.

"I believe that will be one of the key objectives the Fed's new leadership will be expected to pursue."

Editor’s Note: Will This Video Get Obama Fired? See the Evidence.


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