The Importance of “Fedspeak” – Robert Aro (06/02/2020)

The Webster’s New World College Dictionary defines “Fedspeak” as:

(informal) Impenetrable economic jargon used by the US Federal Reserve.

It’s not a condition that affects the chair of the Federal Reserve only; the wave of Fedspeak has been exhibited by members of its inner circle as well. Just last week, in a speech made to the New York Association for Business Economics, Vice Chair Richard H. Clarida said:

On March 16, we launched a program to purchase Treasury securities and agency mortgage-backed securities in whatever amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.

More than $2 trillion were spent on these two asset purchases alone—a figure so large on a subject known to so few. Most will be unable to grasp what this implies for their own lives and future. When the vice chair says that the purchases help “support smooth market function,” who can stand up and ask him to succinctly define this? And further, who will challenge the assertion? How “smoothly” should a market function, and when will they know when it’s smooth enough?

The problem is that this tinkering with the money supply affects the majority of society, i.e., those who are not financially well-to-do central bankers. Ultimately, it’s those on Main Street who will pay for this intervention while buried in an avalanche of debt and stuck at home under government quarantine. Who has time to decode the reflections of a central banker? Thus, it continues. Main Street remains in the dark, guided by those who are equally blind to the principles of economics.

Fedspeak knows no bounds, as its reach has even infiltrated the European Central Bank (ECB), whose latest meeting minutes show a similar use of nebulous ideas when looking at the various risks to economic activity that the virus caused. They noted:

Attention was drawn to the fact that precautionary saving was already increasing and, if consumers did not regain confidence quickly after containment measures were lifted, there was a risk that demand would remain depressed.

The comment alludes to an ideal equilibrium that the virus has thrown off and that therefore requires intervention. Naturally, the central banker sees a problem with savings and demand, he just cannot articulate what the problem is in any discernible way. It is implied that an increase in savings and a decrease in demand, which may be partly due to a lack of confidence, pose a risk to the economy. But how much savings is too much? And how much demand is too little? This remains unknown to all except the central banker.

The Fed’s meeting minutes, also released last week, were no different. Almost as if the Fed and the ECB had had the same meeting, the Fed similarly observed that:

household spending would likely be held down by a decrease in confidence and an increase in precautionary saving.

They use these types of subjective observations, combined with data points, in order to plan the economy. Nearly imperceptibly, they justify their actions with sentences making subjective claims. The importance of Fedspeak cannot be understated. If the general public, academia, and elected officials demanded that the Fed prove how much stimulus, demand, savings, and money supply are needed to save the economy, the very existence of the Fed could be thrown into question. This would be a great thing for society, but very bad for the Fed and the economists it employs.

At the conclusion of the Fed meeting,

Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

With nine credit facilities already running or soon to be in place, the Fed will print as much money as possible to make sure any crisis will be contained. At that point we can only hope that the public will not be looking to the Fed for answers, partly because the Fed is the cause of the problem, but also because any explanation would amount to nothing more than “impenetrable economic jargon.”


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