No. Does not dictate monetary policy. This is somewhat misleading terminology. Your article states "formulates" and "executes", but you must understand that the FOMC can't operate freely. They are under the constraint of the markets both domestic and international for money. For example, if things got bad enough and fear was extremely high, the FOMC could create all the money they wanted, but that doesn't mean any would borrow it. You can lead a horse to water...This actually occurred in 1980.
When the federal funds rate was at 20% and rising, borrowing persisted. The borrowing demand in the inter bank system caused the rate to rise. It wasn't the FOMC setting or controlling the funds rate. The FED was following the market, marking to market as it were. To observers looking backward without direct and intimate knowledge, the 1980 debacle looks like FED was in control. They weren't.
When push comes to shove the FED has zero power. They operate at our, we the people, sufferance. At best they have to sit on the sidelines and hope they can protect the currency. The FED is an abstraction of power. When things become unruly the abstraction evaporates and things default to the way it really is.
The way it really is, the free market, most of the time doesn't need to assert itself. It goes along blithely with whatever mistake the FED chooses. It goes along with FED's price fixing because it's convenient. But if FED acts irresponsibly and abuses entrusted power by trying to use the FOMC to create artificial prosperity, the market will restrict the FED's exercise of power by rendering the instruments they use valueless.
This restriction need not be overt. In fact, currently the market no longer will support FED's marginal abuse through the FOMC device, and its covert response is seen in the changeover from intrinsic deflation to intrinsic inflation. Specifically, this means FED provides funds to prevent rates from rising. The proof is that federal funds trade above target 95% of the time and under, 5%. If any given level of funds rate was sufficiently high to achieve whatever fictitious objective the FOMC has in mind, then the rate wouldn't be erring on the side of demand. It would be in equilibrium fluctuating randomly around the target. This isn't observed and hasn't been for two years and the result is a higher target is need. Then the FED proceeds to undermine that target by supplying reserves at the margin to prevent the possible effects of setting too high of a target! This is sheer madness and it's a quiet vicious cycle.
The belief is that FED's latest target will cool demand. It will, but only long enough for the economy to configure its resource structure and operating procedures such that the latest target has no more significance than any of the previous. This does entail a greater risk for expectations for future profitability since corporations have to adjust to a configuration that demands greater and greater returns. So you can expect that fed funds won't come down and eventually the economy will pick up sufficiently so FED will have to raise federal funds again. No, given what they're doing, they're never done until the free market decides to end the abuse and then they are done.
If this regime falters which it inevitably must do and recession probabilities arise, then FED will go in and try to stimulate final demand with the tools of the FOMC. That they will do this is the hallmark of the market's response to the silent transformation to intrinsic inflation. The cycle's complete. We are entering into a period like the '70s with cyclical bull and bear markets as the FED errs back and forth trying to promote prosperity but only promoting the inexorable rise of structural inflation.
The above isn't OT, it's all anyone needs to know for investment. |
