Oops, I did it again. I read the entire 32-page document containing the minutes from the Federal Reserve's Federal Open Market Committee meeting of September 17-18.
The makeup of the FOMC is slightly confusing, as it is supposed to contain the seven members of the Fed's Board of Governors, plus the head of the New York Fed, and a group of four regional Fed Presidents whose representation rotates in one-year terms among the 12 regions. At this time, there are only five members of the Fed's Board of Governors. I believe there is some confusion in the markets over the role of Governors and regional Fed Presidents, but there is a clear demarcation. Fed Governors are supposed to compose the majority of the 12-member FOMC, and with statutory term-lengths spanning an epoch-like 14 years, these Presidential appointees are set in stone for half a generation.
So, why, if the Fed is so important, is its Board of Governors running two members short? Well the process involves Presidential nomination and Senate confirmation, so that is surely unpalatable to some. President Trump's most recent appointees, Herman Cain, Steve Moore and Nellie Liang, dropped out of the process in April, May and January, respectively. Also, President Trump nominated Marvin Goodfriend to fill one of the Governor slots back in 2017, but his nomination was never acted on by the full Senate and this expired one year after it was made.
This is an issue that few are discussing, and even as a stone-cold finance nerd, I had to Google information about Liang and Goodfriend's "non-confirmations." It's actually quite disturbing. As of last week The Fed controlled a $3.56 trillion balance sheet, and its supervisory board is not even fully populated.
So, in the absence of those two governors, the FOMC is only 10 members strong, and that's why the dissents of James Bullard (he wanted 50 basis points) and the duo of Esther George and Eric Rosengren (who wanted no change) from the Fed's most recent 25-basis point Fed Funds cut is even more disturbing. A full 30% of the voting members voted in a different direction than the consensus, and that makes me think that these clowns have no idea in which their tiny car is heading.
Even with two Governorships open, the header of the Fed minutes shows an astounding 95 participants at September's meetings. Among such a braintrust, one would think there would be a full dialogue and healthy exchange of information, but none seems to have occurred. I searched for the words "CEO," "executive" and "management" and they occurred nowhere in the document.
I wanted to read about ag equipment execs' response to tariff pressures, tech execs' response to IP threats, bank execs' response to the inverted yield curve and all of the good things those who listen to earnings conference calls learn every three months. None of that information was mentioned. As I noted in last week's RM piece on John Williams, the NY Fed President, none of the 95 people in the room would seem to have enough private-sector experience to understand...the private sector.
So, I looked into the making of sausage, and like Upton Sinclair in The Jungle, it scared the hell out of me. I have been hearing from my economist friends that the N.Y. Fed has been in a state of dysfunction owing to executive departures and unfilled positions, but clearly that scenario goes all the way to the top of the Federal Reserve.
These people have no idea what is happening with the U.S. economy. It is that simple. They won't know when a recession begins, and they certainly won't be able to "extend accommodation" to a U.S. economy in a pronounced slowdown because they have been flooding the economy with cash for the past nine years, and it is hard to increase the flow of a tap running at full speed.
It's scary. There is just no one at the tiller of the U.S economy. In that reality I am sticking with bonds (which the Fed is no longer selling, as its balance sheet reduction has ended) and staying away from stocks. Corporate earnings (a phrase that featured only once in the 32-page minutes) are declining and that decline will steepen in the absence of a cogent Fed policy.