. 2020. Edward Yardeni. YRI Press.
offers an in depth explanation of a subject covered by economist Edward Yardeni in his book The Federal Reserve Board. His insights from observing and analyzing the Federal Reserve Board over several many years are summarized in just a few hundred pages. Anyone who has read the book needs to be conversant in his narrative style, which educates the reader in a straightforward, direct manner.
Yardeni covers all features of the Fed, from its beginnings in 1913 to today. He details the changes the institution has undergone when it comes to its structure, mandate, and the sort of people at its helm. In addition, Yardeni explains how the Federal Open Market Committee (FOMC) consists, how its meetings are conducted, who votes, what data is taken into account, and the way the resulting policy statement is disseminated.
The writer emphasizes the importance of understanding who has power throughout the FOMC, how they influence public opinion, and the way the Fed policy statement needs to be read and evaluated to predict the long run direction of rates of interest. As for rigorously interpreting the policy statement, one must consider what happened within the last quarter of 2018. By omitting two words – “accommodative stance” – the September 2018 statement resulted in inconsistent communication regarding FOMC members’ future expectations. Investors concluded that a rate hike was imminent and subsequently lost 20% of value in major stock indices in lower than two months. Markets calmed down after Fed Chair Jerome Powell made his now famous “Powell pivot” by committing the Fed to being “patient” with rate hikes.
profiles the last five Fed Chairs intimately, describing their thought processes before and after they took office. Yardeni explains how philosophy, context, and private belief systems influence the decision-making process. These are unique to every Fed Chair. For example, Ben Bernanke acted the best way he did in the course of the global financial crisis because he understood what was happening in the course of the Great Depression. The United States and the world could have taken a unique path if another person had been the Chair in the course of the global financial crisis.
Yardeni helpfully guides readers through quite a few key historical events, including the dissolution of the Bretton Woods system, the International Monetary Fund (IMF) dollar bailout, the shift in monetary policy from the federal funds rate to the cash supply, and the Fed’s response to market crashes by bailing out banks and bailing out quite a few corporations.
The book is stuffed with fascinating trivia. For example, it’s pure coincidence that Jackson Hole, Wyoming, has grow to be the everlasting site of the Fed’s annual economic symposium, which brings together central bankers, finance ministers, academics, and leading market participants from around the globe. The often underestimated Smoot-Hawley Tariff Act of 1930 helped turn an peculiar recession into the Great Depression. At Yale University, graduate students still use the lecture notes of a former Fed chairman as an unofficial textbook. One Fed chairman was asked to resign by the president but refused despite intense pressure. At one point, someone entered the Fed constructing with the intention of taking the members of the Federal Reserve Board hostage.
The writer shows how investors can take profitable positions by anticipating the Fed’s actions. Portfolio managers who had read this book would likely have positioned themselves to learn from the recovery of dangerous asset classes in the course of the COVID-19 correction in 2020. Yardeni emphasizes that central banks have acted as lenders of last resort for the past 300 years and argues that they’ll proceed to achieve this. He makes it clear that there is no such thing as a point in fighting or questioning the Fed, no matter one’s own ideas about appropriate monetary policy.
The writer briefly touches on unconventional tools that the Fed could use in the long run. One example is the Treasury’s special account on the central bank, which could be filled to pursue employment and inflation targets. In one other current matter, Yardeni expresses his doubts that governments and central banks will allow cryptocurrencies to take over the monetary system.
In summary, it is a crash course for anyone concerned with monetary policy actions, financial markets, and the economy on the whole. Institutional investors, retail investors, business professionals, policymakers, and students can gain a solid understanding of how the Fed has acted previously. This knowledge will help decision makers predict the Fed’s future actions and the associated impact on the economy and financial markets, and determine the suitable actions.
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