Bernanke’s Unprecedented Transparency Reveals a Divided Fed

Add to Google Published by

Is it a coincidence or is The Wall Street Journal using astrology to make their point by portraying Federal Reserve Chairman Ben Bernanke as an archer?

The Sun represents self-identity. Bernanke was born with the Sun in Sagittarius, the sign symbolized by the archer* who aims their arrows high to transcend boundaries. Sagittarius is part of the enthusiastic and impulsive fire element. Martin Kozlowski’s illustration accompanying Alan Blinder’s op-ed piece on “The Fed Is Running Low on Ammo,” depicts Bernanke with one arrow left to shoot into the raging fire. Then an article in yesterday’s WSJ observed that “there aren’t many arrows left in the quiver.”

The problem is you can’t fight fire with fire. Yet that is exactly what Bernanke is doing by continuing to pump liquidity in excess of what the economy is willing to absorb. Until the economy is ready to absorb more liquidity, providing more liquidity solves nothing. The concept that increasing liquidity will expand the economy has its limits at which point the economy will need to evolve on its own. Economic expansion will commence once the de-levering process has been completed. Transformative Pluto in Capricorn (2008-2024) indicates this process will take time as deep structural changes must take place in every facet of the economy.

As I wrote in the Weekly Forecast: “Mercury turned retrograde squaring the Federal Reserve’s natal Venus in Sagittarius and Fed Chairman Bernanke’s natal Sun in Sagittarius, indicating the central bank and its Chairman could come under criticism over its latest monetary policy gambit.” Mercury retrograde (August 20 – September 12) is a time to review communications and policies.

From Bernanke’s description of the economic outlook as “unusually uncertain” to the Fed’s unexpected action at the August 10 FOMC meeting, markets have been anxious the entire week leading up to Bernanke’s speech in Jackson Hole yesterday, especially after investors were rattled by Jon Hilsenrath’s lead story in Tuesday’s WSJ (“Fed Split On Move To Bolster Sluggish Economy”). Citing “interviews with several participants,” the article noted that “at least seven of the 17 Fed officials” at the August 10 FOMC meeting “spoke against the proposal or expressed reservations” about maintaining the Fed’s balance sheet at $2.054 trillion and altering the statement to reflect a slower growing economic outlook.

Although the Fed is determined to keep its financial arrangements private,** it is unprecedented for the central bank to openly reveal disagreement among members in formulating monetary policy. Yet the fact that no one at the Fed disputed or sought to clarify any of the points made in the article suggests the Fed as an institution sought to explain the thinking behind its August 10 move as a preview to Bernanke’s speech.

The WSJ article and Bernanke claimed the reason behind the Fed’s August 10 decision to maintain the balance sheet was that an increase in mortgage refinancing was shrinking the Fed’s balance sheet more rapidly than anticipated. According to the WSJ, New York FRB president William Dudley supported by Eric Rosengren (Boston FRB) and Janet Yellen (San Francisco FRB) viewed the Fed “prematurely applying the brakes” as economic conditions appeared to slow. Like PIMCO, Goldman Sachs has been pushing the Fed to restart quantitative easing. And since William Dudley*** was a former partner and chief economist at the firm, it raises the question if Dudley is completely operating independently.

Although Kansas City FRB president Thomas Hoenig has been the only Fed member to publicly dissent, other members (Governors Kevin Warsh and Elizabeth Duke; FRB presidents Richard Fisher/Dallas, Narayana Kocherlakota/Minneapolis, Charles Plosser/Philadelphia, and Jeffrey Lacker/Richmond) expressed various concerns at the August 10 meeting. These ranged from the belief that credit was already cheap enough and banks still aren’t lending, to hold off altering the balance sheet but tweak the statement to reflect weaker economic conditions, to the risk the move would be seen as a prelude to restarting quantitative easing, to Plosser’s concern that the action “was confusing and ran the risk of scaring the markets.”

Sagittarius is ruled by Jupiter; both preside over the world of academia and philosophical beliefs. The article notes that Bernanke runs FOMC meetings as if he was still a Princeton professor. With his natal Mars and Neptune conjunct in Libra, Bernanke creates the illusion of a unified Fed by allowing everyone to air their views and acknowledges their disagreements before asserting his beliefs.

With his Sun in Sagittarius opposing Jupiter, Bernanke dogmatically clings to his worn out economic models and academic theories. Although Bernanke refused to take preventative measures that could have averted the financial crisis, he has enacted almost every policy prescription cited in an eerily prescient 2002 speech on preventing deflation (a.k.a. the “helicopter Ben” speech).

The combination of Mercury retrograde in Virgo together with Jupiter exactly squaring the Fed’s Sun in Capricorn during the Jackson Hole conference reflects that Bernanke thought he needed to clarify in greater detail that the Fed is maintaining the status quo. These two transits to the Fed’s chart also reflect the analysis paralysis and ridiculously high expectations raised by PIMCO, Goldman Sachs, and the media that Bernanke might announce further monetary easing. Apparently they didn’t carefully read the WSJ article which noted that “Officials spent very little time discussing the idea of expanding the securities portfolio beyond its current size.” And in a CNBC interview before Bernanke’s speech, St. Louis FRB president James Bullard cleared any confusion that PIMCO’s Tony Crescenzi seemed to have. Bullard said the Fed is “letting the MBS roll off and replacing with Treasuries” adding, “I think we’ve probably done as much as we’re going to do in the MBS market.”

Jupiter and Sagittarius represent the explorer who needs room to roam. In cowboy country with the majestic mountains as a backdrop, Bernanke spoke about “The Economic Outlook and Monetary Policy” in the Explorers room at Jackson Lake Lodge in Grand Teton National Park.

Bernanke took great pains to emphasize throughout the speech the Fed’s “vigilance” to do what it can “to ensure continuation of the economic recovery.” But he also emphasized that the economic outlook would have to “deteriorate significantly” for the Fed “to provide additional monetary accommodation through unconventional measures if it proves necessary.”

As he described in his semiannual testimony before Congress on July 22, Bernanke listed three options the Fed has discussed, along with their drawbacks. Since I described the Fed’s remaining “arrows” in “Bernanke Tells Wall Street the Fed’s Hands Are Tied,” I will focus on Bernanke’s concerns about each one.

1. Restart quantitative easing (or what pundits have dubbed “QE2”). Bernanke slightly alludes to whether QE2 would even be effective in an already overly accommodative environment. (Since banks have already parked their excess reserves at the Fed, why does the Fed think putting more liquidity out there would make a difference?) Bernanke raises the possibility that QE2 could create excess inflation if people are skeptical the Fed is capable of implementing an exit strategy before it’s too late. However, Bernanke views this as a positive if inflation expectations are too low.

2. “Easing” through the FOMC statement by defining “extended period” of exceptionally low interest rates. This would require such careful wording and caveats from the Fed it would be meaningless.

3. Lower the interest rate the Fed pays on excess bank reserves kept at the Fed currently at 0.25%. (An interest rate that many retail customers wish they were getting on the money deposited in their checking and savings accounts at the bank!) Cutting the interest rate in half or “even to zero” Bernanke says, “could disrupt some key financial markets and institutions” and only have a negligible effect on long term rates. While I view this easing option as doing the least amount of damage because it seems pretty ineffective, Bernanke’s reservation about this could be to ensure interbank lending doesn’t totally dry up.

4. “Increase the Fed’s medium-term inflation goals above levels consistent with price stability.” Bernanke makes it clear he sees “no support for this option on the FOMC” to raise the Fed’s informal inflation target of 1.5-2% (“official” inflation is running close to the lower end of the target anyway). That’s why even an inflation dove like Bernanke said yesterday that “inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability.” Bernanke went even further to say that “inflation would be higher and probably more volatile under such a policy, undermining confidence and the ability of firms and households to make longer-term plans, while squandering the Fed’s hard-won inflation credibility.” Deflationistas should sleep easier now that Bernanke said “falling into deflation is not a significant risk for the United States at this time.” Jupiter’s energy is expansive and inflationary, so deflation is the last thing we need to be concerned with Bernanke leading the Fed.

As I have written, Bernanke (along with retiring Fed Vice Chairman Donald Kohn and Janet Yellen who President Obama has nominated to replace him), were born with no planets in the earth element. Individuals with the Sun and other planets in the earth element**** (such as Thomas Hoenig and former Fed Chairman Paul Volcker) understand the dangers of an ultra accommodative monetary policy.

Because the earth element rules money and material concerns, these individuals tend to be more attuned to how practical economic theories and mathematical models work in the real world. When the earth element is prominent, it takes time to build a healthy and sustainable economy. That is why the transition from a period of rapid growth and excess leverage during the era of Pluto in Sagittarius (1995-2008) to the contraction and slow growth of Pluto in earth element Capricorn is so hard for impatient fire oriented people to fully grasp.

Pluto in Sagittarius brought the era of globalization as cheap goods produced overseas (combined with using real estate for equity extraction) fueled our consumer-based economy. With most homes underwater coupled with high unemployment, Bernanke remarked he was surprised that consumers are saving more than he anticipated (since Fed policy is meant to punish savers to promote spending). Ever the optimist, Bernanke hopes that once economic conditions improve, consumers will have shored up their balance sheet so they are in a position to spend more. (Someone needs to break the news to Bernanke that consumers will never return to spending as recklessly as they once did as Pluto in Capricorn and the other major planetary alignments I have been writing about represent a seismic societal shift born out of leaner economic times.)

In “Inflation, not deflation, Mr. Bernanke,” Andy Xie points out that “globalization has severely restricted the effectiveness of economic stimulus,” referring to trade as “stimulus leakage.” “Essentially, demand is local, but supply is global. This is why the old assumptions on stimulus are no longer reliable.” As Xie elaborates:

When the Fed or the European Central Bank tries to stimulate, they are actually stimulating the global economy as a whole. Water, no matter where it comes from, flows downwards. Stimulus, similarly, flows to where costs are low and banking systems are healthy. If you believe this logic, the actions of the Fed and the ECB fuel inflation and asset bubbles in emerging economies rather than stimulate growth at home.” When banks begin lending and suppliers raise prices, the Fed will be faced with the “extremely hard” task of removing the massive amount of money that has been injected into the global economy.

Reflecting the frankness of Sagittarius/Jupiter energies, Bernanke takes pride in increasing transparency at the Fed. I believe Bernanke granted the WSJ unprecedented access to the Fed as a forum to allow the doubters on the Fed to speak out in exchange for voting with the Chairman. Sagittarius is a seeker of truth. And the truth is that for all practical purposes, Bernanke has run out of arrows.

*Sagittarius the archer is usually portrayed as a centaur, a being who is half man and half horse. Aries and Leo are the other signs that comprise the fire element.

**On August 20 the U.S. Court of Appeals upheld a unanimous three judge panel ruling from March 19 requiring the Fed to release documentation of all loans the Fed granted following the collapse of Bear Stearns on March 16, 2008 as Pluto (lending/secrets) conjoined the Fed’s natal Sun (its identity/reputation) and opposed natal Pluto for the first time in the central bank’s history. The 20 commercial banks that joined the Fed’s defense of the lawsuit brought by Bloomberg news have already said they will appeal the decision to the Supreme Court. If the Fed doesn’t join the banks it will have 60 days to release the documents by the end of this week under the Freedom of Information Act.

***As of this writing, I have been unable to obtain his birth data.

****Taurus, Virgo, and Capricorn comprise the earth element.

Ben Bernanke: December 13, 1953 time unknown Augusta, GA
Federal Reserve: December 23, 1913 6:02 PM EST Washington, DC

No comments: