Cumberland Advisors Market Commentary – No Conspiracy at St. Louis Fed.

Author: David R. Kotok, Post Date: January 21, 2020

In my opinion the speculation about a conspiracy at the St. Louis Fed may be fodder for internet speculation, but it is simply not true. There is coincidence in timing of unrelated announcements.  We believe it is pure coincidence.

Market Commentary - Cumberland Advisors - No Conpiracy at St. Louis Fed

Here’s the fact set.

1. On January 16, 2020, the St. Louis Fed discontinued the series entitled “Adjusted Monetary Base.” This series of data (eight separate time series) has a very long history and was regularly used by many market practitioners. It was one of the series that led to negative or bearish conclusions by many active market practitioners. On the same date, the St. Louis Fed also discontinued the “Adjusted Reserves” series. This move is consistent with the first discontinuance and stopped another eight lines of data.

2. Nearly Coincident with the discontinuance, the Trump administration officially advanced Christopher Waller’s name for a vacant position on the Board of Governors of the Federal Reserve. Waller is the EVP and director of research at the St. Louis Fed. The administration also nominated Judy Shelton, US executive director for the European Bank for Reconstruction and Development. For months, Waller and Shelton had been informally discussed as potential Trump appointees, so the official action was not a surprise. The timing of announcement was a surprise to some folks.

3. Coincident with these events, some in the financial press speculated that St. Louis Fed President James Bullard was a possible contender for consideration as Fed chairman in a second Trump term. Trump has repeatedly bashed Fed Chair Powell. Bullard was a dissenter on a policy vote at a time when Trump was advocating more Fed easing and Bullard was taking a “dovish view”. All this is a matter of established record. The press speculation surfaced because Judy Shelton, a former Trump campaign advisor who has called for lower interest rates and more coordination between the Fed and other parts of the government, has also been a target of such media discussion. So her nomination triggered another round of speculative press comments on whether she or someone else may succeed Jay Powell in a Trump second term.

4. The St. Louis Fed has discontinued data series many times. Readers can go to the St. Louis Federal Reserve Bank’s website and search on the term discontinued and see the list. Also, the Fed doesn’t always issue an immediate explanation as to why a series is discontinued. A search of the website found no release or advisory about the discontinued “Adjusted Monetary Base” series, but that is not unusual.

5. The St. Louis Fed is a frequently used source of data worldwide. The reserve bank’s FRED database is held in the highest regard by economics and financial-market practitioners. The bank is believed to hold itself scrupulously above political influence, and its managers and staff are professionally dedicated to accuracy and transparency. I personally believe that is the case.

So what’s the big deal?

Detractors try to lump Trump, Bullard, Waller, and the data series discontinuance together in a conspiracy theory. I don’t believe it. They argue that the data series casts the economy in a negative light and is damaging to Trump politically. Maybe it is and maybe not; but it has widespread use (or it did), and the indicators did point in negative directions.

I think that the timing was, in fact, merely coincidental and that Jim Bullard and Chris Waller may not have even known about the timing of the discontinuance. Or they may have seen some internal note at the bank and may not have paused to reflect on how every single item in central banking is highly politicized these days. Given this reality, the public affairs folks in the reserve banks might do well to issue an explanation when they change a data series or discontinue it.

My friend and fishing buddy Doug Ramsey, at the Leuthold Group, writes, “This isn’t the first time the Fed has erased its footprints. Near the end of QE, the Fed discontinued dozens of data series related to bank reserves, including a long-time favorite among stock market students called ‘Net Free Reserves.’” Doug also guesses that this discontinuance is the work of a “staffer or young economist.”

Here’s my bottom line.

There’s no cabal or conspiracy at the St. Louis Fed. It is true that Fed’s communications policy was not sensitive to the intense scrutiny and could have improvement. This is true at the Board of Governors in Washington and at the twelve regional reserve banks. The Fed could introduce a notice or survey period before making changes in data or when discontinuing a series. This notice is especially needed for those series used by market practitioners. In the case of the “Adjusted Monetary Base,” we’re talking about a series with a 100-year history and many prominent data users.

In my view, To cast aspersions about Bullard or Waller or others in the Fed is to take advantage of asymmetric media speculation. First, these officials should not respond to such speculation, and that makes them convenient targets for political detractors. Second, there is no evidence to suggest that the Fed’s very high ethical standards have been compromised. Last, it would be most helpful if certain Washington politicians stopped bashing the central bank in social media. That ill-informed bashing clearly doesn’t alter the policy decisions of the central bank, nor should it. And it clearly does introduce highly charged political invective that further damages the political and social compact on which the success of our nation depends.

I’ve personally found the St. Louis Fed to be very responsive to any questions and would recommend any reader take them to the Fed via the St. Louis Fed website:

David R. Kotok
Chairman and Chief Investment Officer
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