Last Sighting at the Machus Red Fox

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Machos Red FoxDid the mafia assassinate JFK? Was Jimmy Hoffa the man behind the setup? Does the government put fluoride in our water to gain control of our minds? Was the lunar landing staged in a Hollywood studio? Is Elvis alive? Is Paul McCartney dead? Did President Roosevelt plan Pearl Harbor? Does a lightbulb exist that never burns out? Has oil peaked? Are companies brainwashing us with subliminal advertising? Are the Freemasons intent on creating a New World Order? Did aliens land in Roswell? Is everything a conspiracy, including conspiracies themselves? Will we ever know?

Conspiracy theories are a form of high or maybe low mental entertainment. Still, perhaps it’s best to let all of those sleeping dogs lie and focus on what we do know. After nearly a decade on the inside of a highly secretive institution, a.k.a. the Federal Reserve, it came as quite a shock to have several theories assumed to be dreamed up by crackpots validated by fact. Not only are Federal Open Market Committee (FOMC) meeting minutes methodically manipulated, the actual transcripts of the meetings contain overt omissions.

Bear in mind, the Fed was never legally obligated to release the full contents of the audio-recorded transcripts. In fact, it wasn’t until 1993 that the central bank bowed to Congressional pressure to be more forthright about its deliberations. Even so, the five-year lag time (ahem) between meeting and transcript release provides ample time to ensure history is properly recorded.

According to the Fed website, the FOMC Secretariat is quite the taskmaster:

“Beginning with the 1994 meetings, the FOMC Secretariat has produced the transcripts shortly after each meeting from an audio recording of the proceedings, lightly editing the speakers’ original words, where necessary, to facilitate the reader’s understanding (emphasis added). Meeting participants are given an opportunity within the subsequent several weeks to review the transcript for accuracy.”

So the transcriber has leeway to ensure the public is not confused. And participants can make sure they really meant what they said over the ensuing five-year stretch.

News that transcripts are subject to redaction highlights the importance of what is permitted to remain in the public purview. Take this insightful suggestion, recorded as having been said by now Chair Janet Yellen in a transcript from the December 16, 2008 FOMC meeting: “We could also consider using the FOMC minutes to provide quantitative information on our expectations.”

In other words, the verbiage of the minutes can be deployed in the same manner as any other tool at policymakers’ disposal. That was presumably good news to the monetary powers that were as their traditional capabilities to relieve the stresses ravaging the economy were pressing their outer limits.

Consider the historic backdrop of the meeting; it cannot be underemphasized. The economy was in full-blown meltdown mode. Lehman Brothers had failed in September followed immediately by AIG being saved. The unemployment rate had hit 6.7 percent and was rising fast: it would peak at 10.0 percent nine months later. Investment activity was plunging as was the stock market on its way to its March 2009 lows. And those home prices the very same Fed authorities said would never decline on a nationwide basis were crashing. Meanwhile, most of the world’s economies were also in recession.

As for policymakers, they stood at the precipice of the unknown. Their conventional tool of positive interest rates had been all but depleted. Recall that Yellen’s words were said at the meeting at which interest rates were voted to the zero bound. Just days before, on November 25, 2008, the Fed had announced plans to begin purchasing up to $600 billion of securities backed by mortgages to try to loosen the vise of nonexistent mortgage credit availability. Unconventional policy had officially left the launch pad.

When the December 2008 meeting minutes were released, with their usual three-week lag, they painted a harmonious picture of camaraderie and congeniality. Take this case in point which elaborates on the collective thinking behind the crossing of the policy Rubicon:

“Participants emphasized that the ultimate objective of special lending facilities and asset purchases was to support overall market functioning, financial intermediation, and economic growth. Participants acknowledged that the effective federal funds rate probably would need to remain very low for some time.

However, they also recognized that, as economic activity recovered and financial conditions normalized, the use of certain policy tools would need to be scaled back, the size of the balance sheet and level of excess reserves would need to be reduced, and the Committee’s policy framework would return to focus on the level of the federal funds rate.”

It’s hard to believe that nearly seven years have passed lending new meaning to, “remain very low for some time.” As for the federal funds rate at which banks lent each other money in the overnight market, it’s become a financial relic few contemporary bond traders can contemplate.

Not surprisingly, each FOMC minutes release is more anticipated than the last. With the markets and the economist community in sync with their expectation that the Fed is at its first major crossroads in nearly a decade, all hands are on deck.

Few doubts remain about the probability of the first increase in interest rates in nine years on December 16. Some had anticipated that the tragic assaults on the City of Lights would trigger panic in the markets sending the Fed to the sidelines. But that didn’t happen. Confounding many market watchers, the stock market rallied hard on the Monday after the attacks.

The Financial Times’ John Authers tweeted out the following in response to the surreal market behavior: “Paris attacks have had little or no impact on markets so far. Perhaps that’s a little worrying.”

Yours truly re-tweeted Authers’ post adding, “It is unsettling that nothing unsettles markets.”

God help us if the buoyancy in stock prices reflects anticipation that the European Central Bank will expand its own securities purchase campaign to offset the inevitable economic consequences of the terrorist attacks. When will markets wake up to the fact less just might be more in the end?

As for the Fed, it can and will take the opportunity of the release of the minutes of its October deliberations to crystallize its intentions. In deliberately subtle fashion, the lengthy minutes should lean away from an overemphasis on labor market metrics paying after-the-fact homage to the latest job creation figures.

By the opposite token, the persistent weakness in retail sales and manufacturing activity outside of the auto sector should be hinted at. The renewed decline in oil prices, which promises to shrink further the ranks of the handsomely compensated and keep a lid on inflation for a bit longer, can also be alluded to.

What the minutes can’t do is time travel in anticipation of future events. No acknowledgement of the attack on France can thus be on display.

The October meeting minutes are as good as the Fed’s last dance. On this stage, policymakers can reinforce the FOMC statement’s pointed message that December will mark lift-off barring a calamity in the economic data and/or financial markets.

It’s imperative to understand that the Fed is not alone in operating in obscurity. If anything, its international central banking counterparts are less transparent with regard to their decision-making processes.

But that doesn’t make business as usual all good and well. The decisions of central banks directly affect their de facto constituents, especially in a world in which they wield more power than elected officials. The individual contributors who are the building blocks of a country’s economic output can handle, and more importantly, deserve the truth.

Demanding accountability of the Fed is in no way borne of a conspiracy hatched by pot stirrers. It’s one thing for enthusiasts to relish in speculating what became of Jimmy Hoffa after that last sighting at Detroit’s Machus Red Fox restaurant. It’s a much more serious matter to be dismissive of the legitimate need to communicate clearly the method to the “magic” of central banking.

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