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Economic Recovery:

The Fed Chairman's Outlook

The Federal Reserve Bank System

Since the financial meltdown began in the third quarter of 2008, no one has spent more time before the Congress and the American people trying to explain what is happening than the Chairman of the Federal Reserve Bank, Ben Bernanke. Not even the presidents, Bush nor Obama, have had to endure the "hot seat" treatment as frequently or as intensely as Bernanke has had to endure that position. In my opinion, this is exactly as it should be.

Briefly, the Federal Reserve System (informally, The Fed), is the central banking system of the United States, created back in 1913. It is unique in its composition as a quasi governmental organization. It includes a number of private U.S. member banks, each of which subscribe to required amounts of non transferable stock in their Regional Federal Reserve Banks. Overall, the structure of the Fed includes the Federal Reserve Board of Governors, the Fed Open Market Committee, 12 Regional Federal Reserve Banks (each with its own 9 member board of directors), the private banks mentioned above, and various advisory boards from different market sectors. It stands to reason that if you want the clearest picture of U.S. economic activity, the person that oversees the entire Federal Reserve System (currently Chairman Bernanke), is the person you want to hear from.

The 12 Regional Federal Reserve Banks collect financial and market data from their regions on an ongoing basis. They use this data to advise the businesses and financial institutions within their regions in order that those entities may make the best decisions relevant to their particular needs. The Fed Open Market Committee, which sets market interest rates and establishes policy to be carried out by the Fed, is comprised of the Federal Reserve Board members, and 5 of the 12 Regional Federal Reserve Bank presidents. The collective wisdom of each and every participant is considered by the Fed Chairman as he develops and implements policy. It is that policy that steers the economy through good times and bad, consequently it is very important that not only the Congress but also the people hear from the Fed Chairman on a regular basis. The St. Louis Federal Reserve Bank Web site provides a wealth of easy to understand information on the function of the Federal Reserve System.

Chairman Bernanke’s last official appearance before the Congress was just last week. You can imagine that the days immediately preceding his appearance were spent totally in preparation for his presentation. Given the structure of the Fed outlined above, you can also imagine the wealth of information to which he has access. Therein lays the basis for my opinion that this is the man we need to hear from.

What Does Bernanke Have to Say Currently?

"The U.S. economy seems to be contracting at a slower rate than it was a few months ago," he told the Congress last week. His tone of optimism was tempered, however, with the caveat that "We expect that the recovery will only gradually gain momentum, and that economic slack will diminish slowly." He also said that consumer demand "may be stabilizing” and that the "housing market has shown some signs of bottoming." However, by no means did he suggest that we are out of woods as far as the overall economy is concerned.

For example, Bernanke offered a less than glowing forecast for the corporate sector, saying that indicators of business investment "remain extremely weak" and that commercial real estate conditions are "poor." We can still see a very poor outlook for employment based on the monthly jobless claims numbers so far this year, which supports his view of the weakness of investment in the corporate sector. Furthermore, a brief drive through any of the local business districts or strip malls near any of our homes reveals more "for rent" signs and "going out of business" sales signs than any of us can remember.

Nonetheless, some lawmakers asked Bernanke when all of the "emergency actions" taken by the Fed in recent months would come to an end, obviously with a view oriented toward the huge deficit spending and subsequent budget battles facing the Congress. Bernanke replied that "It's very important for us to provide a lot of support for this economy right now because it needs support, but at the same time we understand the necessity of winding this down in an orderly way at the appropriate moment so that we will not have inflation problems on the other side." Translation: we know the stimulus package and the lowest interest rates in 50 years are going to trigger inflationary price increases; however we are anticipating these problems and believe we will be prepared to deal with them.

For many looking to mend some of the damage done to their retirement accounts, college funds, and personal investments, the key to a successful recovery may be directly related to the direction and the velocity of interest rate changes in the months to come. I believe we should be watching and listening closely to the Fed Chairman; our personal financial futures are largely dependent upon his actions.

©Patrick J. Catania 2009
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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