Fed Up?

News from all corners of the world seems recently to be edging towards extremism – politically and economically, domestically and abroad. The Dutch prime minister resigned yesterday amid deteriorated budget support. The Socialist French presidential candidate (Ms. Le Pen) is pushing her competitor Sarkozy to the right as well; Sarkozy is now proposing creating mandatory French-language exams for foreigners wanting to settle in France and tightening immigration restrictions. 

China is cracking down on internet access and deleting micro-blogging accounts to control news of Bo Xilai, the Chongquing party chief who was ousted from office in March, while his wife remains under arrest for the suspected murder of a British man late last year. Greece and Spain still teeter on fiscal cliffs as they face desperately needed spending cuts. If enacted, the spending cuts could plunge them even more deeply into recession and exacerbate citizens’ unrest; if ignored, unrestrained spending would propel an already untenable debt. Greece’s exit from the Euro, once unthinkable, could become more likely if countries like Germany and France become more xenophobic and less willing to support their debts.

Among all of the chaos, many ears in the US are in fact tuned in to the Fed and today’s FOMC press conference to hear the Fed’s opinion on the economy (and therefore QE3).

But what on earth is the FOMC? And what exactly does the Fed do?

 Anyone? Anyone? … Bueller?

The Fed is fairly mysterious to most people (I used to envision Ben Stein from Ferris Bueller’s Day Off), so I am dedicating this post to the Fed: who runs it, what they do, and why we care.

i.                     Who Runs the Federal Reserve

Most people have heard of Ben Bernake, the current Federal Reserve chairman (and his predecessor, Alan Greenspan). But while Bernake garners most of the media focus, there is actually an elaborate hierarchy governing the Federal Reserve:

·         Board of Governors

o   7 governors (each with a 14 year term, appointed by the president)

o   1 chairman (4 year renewable terms)

·         12 Regional Federal Reserve Banks (shown in the map below)

·         Federal Open Market Committee (FOMC)

o   7 Fed governors

o   5 of 12 regional bank presidents (1-year rotating basis)

o   The FOMC meets 8 times per year to determine monetary policy. Minutes are released from their meetings and posted to the Fed website – these are closely monitored, because the FOMC’s plans for monetary policy affect the interest rate and other critical aspects of the economy.

ii.                   What are they trying to do?   

The Fed has 4 avowed primary goals:

1.       Conduct monetary policy to pursue maximum employment and stable prices (their “2-fold mission”)

2.       Supervise and regulate banking institutions

3.       Maintain stability of financial system and contain systematic financial market risk

4.    Provide financial services, including playing a major role in operating the nation's payment system

What does this really mean? The main goal of the Fed is to contain inflation (they benchmark 2% annual change in the price index for personal consumption expenditures) and create the “maximum level of employment” – i.e. setting monetary policy to encourage employment to be at the economy’s full potential level.

The Fed mainly accomplishes this by setting the Fed Funds Rate, the rate at which banks can borrow money. The lower the rate, the more it stimulates the economy (banks have very “cheap” money, making them more likely to borrow in order to invest in projects), but the lower rate means that the Fed is pumping money into the economy, creating future inflation.

So how does the Fed decide on a rate?

The Taylor Rule is a useful guidepost.

Taylor Rule ->  i = 2% + π + 0.5(π-2%) + 0.5(Y-Y^FE)/ Y^FE

Terms:

i = target interest rate

2% = the Fed targeted inflation rate

π = current inflation rate

Y-Y^FE = output gap (i.e. how big the gap is between what our economy is producing and what it could produce at full capacity)

Below is a graph of the Taylor Rule (and an adjusted “Alternate Taylor Rule”) against the actual Fed Funds Rate (from Marquette Associates)

What are the implications of the Taylor Rule?

Interestingly, you will note in the graph above that the Taylor rate suggested we needed a negative Fed Funds rate in 2009 – though of course this is impossible as interest rates cannot go below zero. But this is an important point. The Fed is “zero-bound constrained,” meaning that once rates are at zero, its hands are largely tied in terms of further stimulating the economy through low interest rates. It has contemplated trying "QE3," a third round of quantitative easing that would try to ensure rates near zero for a longer period of time, but this is unlikely unless the economy continues to significantly falter.

Another interesting implication here is the gap between the Taylor rule and the Fed rates in 2002-2005, where the Taylor rule suggested higher rates before the Fed actually raised them. Of course hindsight is 20/20, but the Fed has been criticized by many of contributing to the housing bubble by keeping rates too low for too long during that time, allowing banks cheap money to give away to risky mortgages and other risky bets.

Also of note is the current 2012-2013 projected gap. Per the Taylor Rule, the Fed should now be raising rates to 1-2%, the Fed has publicly committed to leaving rates around 0% until 2014. With the mixed economic news recently, it is hard to tell the Fed’s best course of action, but leaving rates low for such an extended period of time will likely lead to serious inflation issues once the economy begins to recover. Our supposed economic “recovery” is largely because of QE1 and QE2, which has given us an addiction to cheap money. If the Fed makes it clear that QE3 will not happen, the economy could be in for another drop.

So that’s the Fed in a nutshell. Probably 75% of you now commiserate with the students asleep in Ferris Bueller’s economics class, but for those who always secretly wondered what exactly the Fed does, hopefully this has helped.

Strawberry Fields Forever

With late April upon us, the warmer weather brings memories for me of annual strawberry picking treks growing up in Virginia. A bit cliché perhaps, but there is nothing quite like eating strawberries from the vine with the warm juice trickling down your chin. (Equally fun is throwing over-ripe/mushy strawberries at your sibling, minus the farmer’s threats to kick you off the farm – but that is another story).

I have been experimenting with a few pie crust recipes recently. For years I’ve used Pilsbury refrigerated crusts – they are super easy and actually quite tasty. But I wanted to find a good from-scratch crust, partly out of stubbornness to declare a truly homemade pie. The first recipe or two were fairly involved in getting the right consistency, and the crust ended up being rather dry/flavorless as compared to the refrigerated stuff (which is doubly depressing because then you not only wasted time and created a mess, but your pie isn’t very good).

After burning through a few recipes, I found the one below and like it for the better flavor and fairly crumbly texture. A bit trickier than refrigerated crusts since it requires some rolling, but it’s quite forgiving (read: if the crust sticks to the mat and completely falls apart before getting into the pie dish, its soft/pliable enough to easily squish back together in the pie dish - I speak from experience).  I used the recipe last night to make a strawberry rhubarb pie (hence the stroll down strawberry memory lane), so I am passing along both recipes with my comments:

Pie Crust

The full recipe makes rather an awkward amount – enough dough for four small crusts or 2.5-3 large crusts.  This is handy if you want to freeze some for later, but otherwise inconvenient. A half recipe makes a smallish double crust pie of ~ 7-8 inches. I was making a deep-dish 9-inch pie so I did the math to create ¾ of a recipe (for the egg I blended it, then scooped out what looked like ~ 1/4... ish. This is why I love forgiving recipes.):

Ingrdients:

• 4 cups all-purpose flour
• 1 3/4 cups shortening
• 3 tablespoons white sugar
• 2 teaspoons salt
• 1 egg
• 1/2 cup water

Directions:

In a large mixing bowl, combine all-purpose flour, shortening, sugar, and salt. Blend together with a pastry cutter until crumbly. In a small bowl, mix egg with water. Blend into flour mixture. (Don’t overmix the dough or it will end up very non-flaky and non-delicious!) Chill in refrigerator until ready to use. Note: I read that you should chill homemade pie crust in the fridge for 1 hour before rolling it out. This allows the gluten to “relax” and helps create a flaky texture. I made ¾ of a recipe of dough, then split the dough into two discs to refrigerate.

Strawberry rhubarb pie filling (from Food Network website):

A brief interlude for those wondering (like me, initially) what the heck rhubarb looked like - it looks like this. Pinkish celery. To prepare, cut off the ends and dice into pieces. If it looks stringy, peel off strings like you would with celery. And never eat rhubarb leaves! They are poisonous. Bad.

 

• 2 1/2 cups chopped red rhubarb, fresh (I sliced it into pretty tiny pieces, but ~1/4 to ½ inch is probably fine too)
• 2 1/2 cups de-stemmed, washed and cut strawberries (In larger pieces – I cut the berries into 3-4 slices each so they were pretty chunky)
• 1 1/2 cups sugar (1 1/4 cups for high altitude)
• 2 tablespoons minute tapioca (I did 3 tablespoons since I like pie less juicy – some comments on the website mentioned using up to 4 tablespoons)
• 1 tablespoon all-purpose flour
• 1/2 teaspoon lemon zest (I only had lemon juice on hand, so I ignored the zest)
• 1/2 teaspoon lemon juice
• 1/2 teaspoon ground cinnamon
• 1 teaspoon vanilla extract
• 3 tablespoons butter, cubed small
• 1 egg white beaten with 1 teaspoon water
• Large granule sugar (I didn’t have this, so I just sprinkled normal white sugar on top. Had the same effect)

Filling Preparation:

Preheat oven to 425 degrees F. Mix the rhubarb, strawberries, sugar, tapioca, flour, zest and juice of lemon, dash of cinnamon, and vanilla. Mix well in a large bowl and pour out into chilled crust. Dot the top of the filling with the butter. Brush edges of pie crust with egg white wash. Roll out the other piece of dough and place over filling. Crimp to seal edges. Brush with egg white wash and garnish with large granule sugar. Collar with foil and bake at 425 degrees F for 15 minutes. Decrease temperature to 375 degrees F and bake for an additional 45 to 50 minutes, or until the filling starts bubbling. Higher altitude will take 450 degrees F and 400 degrees F respectively. Also, you can use a pie bird for extra décor (I left this because that’s what the recipe says – but a pie bird, really? I'm not sure what that is, but I'm pretty sure manhattanites in small kitchens won't have it). Let cool fully before serving. (Don't cheat and serve this pie warm or it will be super runny - it needs to set to let the tapioca gell).

The critical last step? Enjoy!