The Fed was also not shy about placing part of the blame for the sluggish economy at the feet of elected officials. The FOMC statement read: “Fiscal policy is restraining economic growth.”
Many market participants and pundits took this as a reference to the partial government shutdown and debt ceiling debate. We believe that the Fed’s blaming of fiscal policy goes far beyond October’s developments.
During his Humphrey-Hawkins testimony last May, Fed Chairman Bernanke explained to members of Congress that “monetary policy is not a panacea.” Back then it was thought that Mr. Bernanke was referring to the sequester. Although the sequester-related spending cuts were on the Chairman’s mind when he made that comment, we believe that Mr. Bernanke’s concerns go beyond spending cuts. While we cannot read Mr. Bernanke’s mind, we are fairly certain that he is frustrated with the lack of pro-business and pro-growth fiscal/economic policies within the administration’s economic plan.
During the past few years, Mr. Bernanke has been portrayed as some kind of left-leaning Keynesian, ready and willing to use government spending to boost economic activity. This is a canard circulated by far-right-leaning pundits and politicians. We believe that this does Mr. Bernanke a disservice. It should be remembered that while servings as President George W. Bush’s Chairman of Economic Advisors, Mr. Bernanke was a staunch supporter of the Bush tax cuts as a way to stimulate the economy. Although the “Bernanke Doctrine” advocates printing money, lowering rates and devaluing the U.S. dollar as methods of stimulating growth, these are meant to be used in the context of prevailing fiscal policy. On several occasions, Mr. Bernanke has stated that the Fed must work within the constraints of fiscal policies.
We take this to mean: The policy tools the Fed uses and the magnitude of their use will be determined by the tailwinds or headwinds created by fiscal policies. Judging by the magnitude of monetary policy accommodation and the sluggish economic growth the U.S. has experienced during the recent recovery, it would appear that the economy is battling significant fiscal headwinds from policies which not only stifle growth, but do not reflect demographic and structural changes within the U.S. economy.
By Thomas Byrne – Director of Fixed Income – Investment Consultant
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.
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