By: Sean P. Smith, CFA
May 10, 2016
Accredited Investors Wealth Management is a proud sponsor of the Economic Club of Minnesota. Yesterday, Neel Kashkari, the new President of the Federal Reserve Bank of Minneapolis, spoke at an Economic Club luncheon and focused on what what the Fed can, and perhaps more notably, cannot, actually influence through its policies.
It is Kashkari’s view that the financial markets are far too focused on Federal Reserve policy. Though many factors that impact the long-term state of the U.S. economy are entirely outside of any Fed influence, he believes that market participants – and financial media – are zeroed in on the short-term policies that Fed can undertake, at the expense of the myriad other levers that help steer our country’s economic ship.
In essence, it was a speech downplaying the ultimate influence and importance of the Central Bank. Yet the tone of the speech came across neither as false modesty nor as the basis for an excuse as to why economic conditions have yet to return to their pre-financial crisis norms.
Rather, the points presented by the new President were entirely rational, reasonable, and, for lack of a better term, obvious. The Fed is but one (very important) cog in the overall economic machine, and Kashkari highlighted the Fed’s influence in three particular areas:
– The ability to set a long-term, stable monetary policy, with the goal of inflation stabilization
– The ability to respond to a financial crisis
– The ability to influence short-term economic performance, which does not impact the long-term trajectory of the economy
Notably outside of the Fed’s circle of influence are areas that can have far greater impact on long-term economic health, including fiscal spending, technological innovation, worker productivity, and demographic trends.
The fact that Kashkari’s focused on points that should be rather obvious made his speech particularly notable.
Not long ago, Fed policy was not a major topic of conversation outside of narrow financial industry, political, and academic circles.
The global financial crisis changed all that, when the world’s central banks, led by the Federal Reserve, played a critical role in time of emergency. And the years since have been anything but typical from a monetary policy standpoint.
Today, however, Fed news is everywhere, and speeches like the one President Kashkari gave to the Economic Club have the potential to move short-term markets, based on the whims of the speaker, and how their comments deviate or align with current market expectations.
His speech was neither groundbreaking, nor self-important, nor market-moving. Which in turn made it particularly refreshing, and it felt like a nice fit coming from traditionally modest Minnesota. A little less attention on Fed monetary policy wouldn’t be a bad thing. At the very least, it should be viewed in the context of a bigger economic picture.
Now, with all that said, the new Minneapolis Fed President’s signature issue right out of the gate is a policy initiative focused on the structure of the financial system, and whether the large banks are still “too big to fail.” The Fed branch is hosting a series of symposiums, conducting research, publishing papers, and even has its own hashtag. In other words, President Kashkari may downplay the ability of the Fed to alter the long-run trajectory of the economy, but there are other ways, both long and short-term, in which the Fed’s influence on the financial systems reigns supreme. Modesty has its limits.
We’ll soon have more on the Fed’s #EndingTBTF initiative in another post.