Congress & The Fed

October
14

Written by: Jon McGraw

The Markets

Do world stock markets believe Congress is just offering up some Halloween excitement?

Last week, they responded to the government shutdown in the United States and the possibility the U.S. might default on its debt for the first time ever with the bravado of teenagers standing in line for a haunted house. Markets around the globe finished the week higher with some notable exceptions that included Chinese and Mexican markets and America’s NASDAQ.

It’s also possible market performance could be attributed to the lack of economic data available since the government shutdown. Even private economic indicators sometimes rely on federal government information to calculate their numbers, so markets may be weighting signs that America’s elected officials are making progress more heavily than they might if other data were accessible.

The positive progress in U.S. stock markets is particularly interesting since a lot of Americans – many of whom may be investors – have negative feelings about the fiscal policy impasse in Washington, according to a new NBC News/Wall Street Journal poll. Sixty percent of Americans polled said “if they had the chance to vote to defeat and replace every single member of Congress, including their own representative, they would.”

That may go a long way toward explaining the recent deterioration of consumer sentiment in America. The Thomson Reuters/University of Michigan’s overall index on consumer sentiment declined for the third month straight in October. The change was relatively small, but sentiment reached its lowest level in nine months.

 


Data as of 10/11/13

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.8%

19.4%

18.9%

13.5%

11.2%

5.0%

10-year Treasury Note (Yield Only)

2.7

NA

1.7

2.4

3.9

4.3

Gold (per ounce)

-3.4

-25.3

-28.5

-2.2

8.8

13.1

DJ-UBS Commodity Index

0.4

-8.1

-14.1

-4.2

-2.6

-0.1

DJ Equity All REIT TR Index

2.9

5.5

8.7

12.3

10.6

9.5

 

A FEDERAL RESERVE SYSTEM PRIMER…

Last Wednesday, vice chair of the Board of Governors of the Federal Reserve Janet Yellen was nominated to take over as Chairman when Ben Bernanke steps down in January. If confirmed, she’ll take the helm of the institution entrusted with safeguarding our country’s monetary and financial system.

For those of you who attend our annual luncheon at the Kansas City Club in conjunction with the Federal Reserve Bank of Kansas City, this may be old hat.  However, if you would like a refresher here are a few facts:

Congress established the Federal Reserve System a century ago in response to the financial panic of 1907. According to the Federal Reserve Bank of Boston:

 “Financial panics and bank runs were all too common during the 19th and early 20th centuries. Some were more severe than others, but most followed the same general pattern. The misfortunes of a prominent speculator would undermine public confidence in the financial system. Panic stricken investors would then scramble to cut their losses. And, because it wasn’t uncommon for speculators to double as bank officials, worried depositors would rush to withdraw their money from any bank associated with a troubled speculator. If a beleaguered bank couldn’t meet its depositors’ demands for cash, panic would quickly spread to other banks. (Remember! There was no federal deposit insurance until 1933. If a bank failed, depositors had little hope of ever seeing their money again.)

The panic of 1907 ended when J.P. Morgan intervened and set up emergency loans for financial institutions. The clamor for reform led to the passage of the Federal Reserve Act (which created the Federal Reserve System (Fed), which became law in 1913.

Today, the Fed includes a Board of Governors in Washington, D.C. and 12 Federal Reserve Banks. The Board of Governors oversees the Fed. Its members are appointed by the President of the United States and confirmed by the Senate. They serve 14-year terms. The Reserve Banks are responsible for the Fed’s day-to-day operations which include “conducting monetary policy, supervising and regulating banks, and providing payment services all help maintain the stability of the financial system.”

Monetary policy is set by the Federal Open Market Committee (FOMC) which is composed of 12 voting members and includes the seven members of the Board of Governors and a rotating group of five Reserve Bank presidents. The chairman of the Board of Governors is also the chairman of the FOMC.  If you would like to learn more about the Federal Reserve System please visit The Fed.

Weekly Fun – Think About It

“The greatest thing in family life is to take a hint when a hint is intended – and not to take a hint when a hint isn’t intended.”  –Robert Frost, American poet