Tomorrow the Federal Reserve will conclude one of its regular policy sessions. This meeting's different, however, because in addition to the usual news release that reads like a fortune cookie, and has meaning only when held up to the light and compared to the previous statement, the Fed is trying out a new communications strategy where Chairman Ben Bernanke will take questions from the financial press -- on television even. I'll be at my desk, rather than at the press conference.
Even if I were there to subject Mr. Bernanke to withering interrogation, I doubt the statements tomorrow will contain a message that is very different from the prior paper-based one. Today on CNBC the talking trading heads seem to think that Chairman Bernanke won't be able to take the heat of journalists' tough questions. Don't flatter yourselves: I'm sure he has worked out an agency-line answer on every possible topic. Besides, the Fed talks to reporters plenty off-the-record, and Fed governors are making speeches all the time, so there is seldom much truly new news. But I'm going to pose a few questions anyway and hope they trickle down.
1. U.S. corporations are holding a trillion of dollars in cash on their balance sheets, and one of the Fed's directives is to maintain full employment. Is there some way the Fed can lean on them to put it to work, to directly and indirectly hire more people?My own answer: Not likely. The Fed operates by managing interest rates, and there's already a huge incentive to businesses to borrow, in the form of bargain rates on bonds and bank loans. The thing that will make companies want to spend is seeing their customers spend, which means employment has to pick up on its own first.
2. The dollar continues to fall in the world currency markets. Shouldn't we be raising interest rates to counteract that?My answer: Not any time soon. Below is a graph of the dollar against major currencies -- a two and a half year low. A low dollar makes U.S. manufactured goods, the few that are left, more attractively-priced in the world markets, and exports are a bright spot in the economic recovery, up 32 percent since the end of the recession. Besides, strengthening the dollar would entail raising interest rates and get in the way of the housing market.
For the financial mavens, here is a story from the Financial Times about how the week dollar is getting weaker through its role in carry trades.
Last, about a year ago Secretary Treasury Geithner reassured an audience of Chinese students that U.S. policy was for a strong dollar, and that Chinese government investments in U.S. Treasury bonds were safe. "His answer drew loud laughter from his student audience," Reuters reported.
3. On the topic of housing, should we stop expecting housing to be a driver of growth in this economic cycle? Low mortgage rates don't seem to be working.My answer: Actually this will be a tough one to answer with a positive spin. Due to past policies, the housing inventory is so large that no new housing will be required for a long time, and besides, so many people are out of work that no one wants to buy anyway. But even so, even if slow housing were the only problem it would not justify higher interest rates (as a measure to strengthen the dollar, perhaps, which as we just saw is not what we want anyway).
4. Commercial bank loans are not growing. Isn't bank lending one of the Fed's important tools to spurring economic growth, and what progress is showing?My answer: I wrote on this yesterday, from the point of view of small businesses, but it seems loans are not growing for businesses of any size. In a speech to a financial conference, Fed Governor Elizabeth Duke reported that the Board's surveys show that the biggest factor holding things back is a lack of customers. We need more spending, and for that we need more jobs! Somehow.
5. Regarding the budget deficit, many governments have had successes with selling their operations to private investors. Seeing as the Fed earned a profit of $78 billion in 2010, and $47 billion in 2009 -- way more than even the $13 and $19 billion Goldman Sachs made in the same periods -- will you be taking the Fed public any time soon?
My answer: Actually that idea is not as outrageous as it sounds. The central bank of Switzerland is partially owned by the public, about 40 percent. But the proceeds would be a single drop in a very large and leaky deficit bucket -- Goldman Sach's market value is about $80 billion these days, and at similar valuation the Fed would be worth maybe $400 billion. Even half of that would not even start to meet the trillions we need to plug our budget gaps. And we might not want to highlight that to the world investment community any more often than we have to. Although maybe if the Fed started a hedge fund...