Book Review: Watching the Fed for Fun and Profit

Watching the Federal Reserve for Fun and Profit: A Primer for Investors. 2020. Edward Yardini. YRI Press.

Watching the Federal Reserve for Fun and Profit: A Primer for Investors Provides a detailed explanation of the topic discussed by the economist Edward Yardeni Predicting the markets: a professional biography. His lessons from following and analyzing the Federal Reserve over several decades are summarized in a few hundred pages. Those who read Anticipate the markets He should be aware of his narrative style which guides the readers in a simple and direct manner.

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Yardeni covers all aspects of the Federal Reserve, from its beginnings in 1913 to the present day. It explains in detail the transformations that the institution has undergone in terms of its structure, powers, and the type of individuals who head it. In addition, Yardini explains how the Federal Open Market Committee (FOMC) is formed, how its meetings proceed, who votes for, what data is looked at, and how the resulting policy statement is published.

The author stresses the importance of determining who is powerful within the FOMC, how they influence public opinion, and how the Fed’s policy statement should be read and evaluated in determining the future direction of interest rates. On the question of the exact interpretation of the policy statement, consider what happened in the last quarter of 2018. Dropping two words — “consensual position” — the September 2018 statement created inconsistent communication regarding the future expectations of FOMC members. Investors concluded that a rate tightening was in store, and so it had shaved 20% off the value of major stock indices in less than two months. Markets calmed down after Fed Chair Jerome Powell executed the now famous “Powell Pivot” by requiring the Fed to be “patient” in raising interest rates.

Watching the Fed for fun and profit Detail profiles of the last five Federal Reserve Chairs and describe their thought processes before and after taking office. Yardini explains how philosophy, context, and personal belief systems influence decision-making. These are unique to each Fed Chair. For example, Ben Bernanke acted as he did during the Global Financial Crisis (GFC) because of his understanding of what happened during the Great Depression. The United States and the world could have gone down a different path if someone else had assumed the presidency during the GFC.

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Yardeni helpfully takes readers through a number of important historical events. Among them are the dissolution of the Bretton Woods system, the International Monetary Fund (IMF) dollar rescue package, the shift in monetary policy targeting from the federal funds rate to the money supply, and the Fed’s response to market crashes by bailing out banks and bailing out a variety of companies.

The book contains a wealth of fascinating trivia. For example, it is purely coincidental that Jackson Hole, Wyoming, becomes the permanent destination of the Federal Reserve’s annual economic symposium. Central bank governors, finance ministers, academics and major market participants from around the world attend the event. The little-appreciated Smoot-Hawley Tariff Act of 1930 helped turn an ordinary recession into the Great Depression. At Yale, graduate students still use former Fed chair class notes as an unofficial textbook. One of the chairmen of the Federal Reserve received a presidential request to resign but refused to do so, despite intense pressure. A person once entered the Federal Reserve building with the intent of taking members of the Federal Reserve hostage.

The author shows how investors can take profitable positions by anticipating how the Federal Reserve will act. Portfolio managers who read this book likely positioned themselves to benefit from a rebound in risky asset classes during the COVID-19 correction in 2020. Yardini contends that for the past 300 years, central banks have acted as lenders of last resort, and argues that they will continue to do so. He makes clear that there is no point in fighting or speculating about the Fed, regardless of one’s thoughts regarding appropriate monetary policy.

The author touches briefly on unconventional tools that the Fed may use in the future. One example is the Special Treasury Account with the central bank, which can be filled to meet employment and inflation targets. In another timely matter, Yardini expresses doubt that governments and central banks will allow cryptocurrencies to take over the monetary system.

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In summary, Watching the Fed for fun and profit It is a crash course for anyone interested in monetary policy measures, financial markets, and the economy in general. Institutional investors, individual investors, entrepreneurs, policymakers, and students can gain a solid understanding of how the Federal Reserve has acted in the past. This knowledge can help decision makers predict future actions of the Federal Reserve and their associated economic and financial impacts on the market and decide what actions to take accordingly.

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All posts are the opinion of the author. As such, it should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of the CFA Institute or the author’s employer.

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