First Quarter Investment Commentary 2024

Dennis O'Keefe |

There seems to have been more focus on the Federal Reserve in the last few years than ever before. Many people hang on to every Fed official's comment, but few understand what they do and how they work.

The Federal Reserve was created by an act of Congress in 1913.  There are many reasons for a country to have a federal bank.  But probably the most important in 1913 was just to cash checks.

Think of what we take for granted today.  You write a check to a firm in San Diego and mail it across the country.  (Assume that you still write checks and mail them out - our current system of credit cards and electronic payments are further results of the Federal Reserve system.)

A few days later, the vendor in San Diego takes your check to his local bank and cashes it; receiving the funds and sending your goods across the country to you.

How does the bank in San Diego know your check is legitimate?  Or that you even have a bank account?  More importantly - how do they know that your bank even exists?

The Federal Reserve System set up procedures to simplify the transfer of money all across the nation.  Instead of the bank in San Diego requesting money directly from your bank, it does so via the Federal Reserve. 

You’ll notice not only the magnetic numbers at the bottom of your check, but a small sequence of numbers usually at the top right hand corner of your check - these denote who your bank is to other banks in the system.

This organized system allowed capital to move more quickly, increasing the rate of industrial production within the country. 

Of course, if you spend any time on Facebook, you’ll hear stories that the Fed is not really part of the government and is part of some sort of shadow organization that is trying to control us, take all of our money and turn us into batteries. . . . wait, that’s the plot of The Matrix.  

I’ve read dozens of these diatribes (on the Fed, not on The Matrix).  I’m not sure what the conspiracy theorists think that the “lizard people'' want to do with us once they get total control.  

The Fed also has control over the economy via something called “monetary policy.”  There are many policy tools available, but historically, the Fed has used two most commonly.

The lesser-known method the Fed uses to control the economy is through reserve requirements.  They set the rules of how much money a bank must have on deposit at the Fed.

Raising reserve requirements reduces the amount of money that banks have available to lend.  Decreasing them pushes more money into the banks and maintains a free flow of capital.  Since Covid broke out four years ago, reserve requirements are at or near zero.  

The more publicized and likely more effective strategy of the Federal Reserve is setting short-term interest rates.  If you were lamenting your low CD rates from 2008 through 2022, blame the Fed.  If you have a 7% mortgage today. . . . blame the Fed.

Again, the Federal Reserve uses interest rates to speed up or slow down the use of capital.  If the Fed believes that the economy is becoming “overheated” and facing high inflation, it can increase interest rates.   This will cause individuals and businesses to borrow less money for purchases, hiring and expansions.  The economy theoretically slows down and does not lead to an economic crash.

Likewise, when the country faces hard economic times, lowering interest rates entices more folks to borrow, speeding up the flow of capital within the country and pulling us out of poor economic times.  In theory.

In practice, this is not an exact science.  Sometimes you raise rates and everything still falls apart.  Other times, you lower rates and the economy stagnates.

Who runs the Fed?  That’s probably the most important question.

When we talk about the Fed, we are really talking about the people who set the interest rates. Who runs the Federal Reserve Bank of Boston or San Francisco is of little concern to us. What we want to know is who is setting interest rates.

Interest rates are set by the Federal Open Market Committee (FOMC).  It is made up of the Fed Chair, the Fed’s Board of Governors as well as a collection of other Fed officials.  All of these officials are appointed by a President and are confirmed by Congress.  (Sorry, conspiracy theorists.  Who runs the Fed is a very public and bipartisan process.)

Here we run into a bit of a problem.  It’s a problem endemic to government.  Systems are set up and then, over time, the bureaucrats take over.  No matter how noble the intentions are, over time, intentions are forgotten and the institution becomes its own machine.

The stated purpose of the appointed Fed Governors is to reflect a "fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country"

Could you care to guess how many of the 8 Governors and the Fed Chair are anything but government employees and/or university economists/professors?

Would zero surprise you?

Not a single current Governor is from any sort of industry.  No bank presidents (although there is one Governor who served with the World Bank, which I will argue is not a banking position).  No captains of industry.  Certainly no farmers or manufacturers.

What I also find fascinating about the FOMC is that the board tends to vote the opinion of the Chair in policy decisions.  It seems it is “their” board and if they desire a result, it happens.

The first Fed Chair was a lawyer and politician.  Way back in 1913.  That is somewhat understandable.  The whole Federal Reserve system was brand new.  It was to be expected that a lawyer would be there to help make sure everything aligned with the new law.

Of the next ten appointees - from the 1916 until the appointment of Paul Volker in 1979, nine were industrialists.  Only one government man was appointed.

Let me pause for a second and say I’m a big Paul Volker fan.  He pulled us out of the stag-flation disaster in this country and helped steer the ship under both Carter and Reagan.  He was a government employee but he knew how to get things done and was not afraid of crisis.

Since 1979, all appointees have been government employees.

Why do I feel this is so important?  Because government service does not teach you how to make good decisions.

Let me say that again.  Government service does not teach you to make good decisions.

In fact, government service teaches you to leave things along and hunker down and wait.  As far as government is concerned, those who make decisions often get shot for doing so.  And rarely do people remember you as the captain of a ship that went down without you making a single decision.

 That brings us to today.  I’ve talked often about the Fed and their inability to make decisions for a decade or more.  They do not make decisions unless the decision is forced upon them.  

Alan Greenspan made a post-Fed career of telling audiences that he foresaw the problems with the dot-com boom in the late 90’s.  But he never raised interest rates to slow the economy down.  

Janet Yellen set economic targets that needed to be reached before the Fed ceased a program to buy trillions of dollars of Treasury bonds and other securities.  When those targets were reached, she reset them to new levels, leading to additional trillions of dollars of debt for this country.

Jay Powell two years ago told us that inflation was “transitory” and we did not need to increase interest rates to combat it.  Within months he had to turn tail and raise interest rates at a record-setting rate to combat this “transitory” inflation.

These are all good people.  They aren’t some evil cabal designed to destroy America.  But they are terrible decision-makers.  

Currently, short-term interest rates hover near 5.5%.  Inflation is somewhere around 2-3%.  Powell’s Fed is forecasting three rate cuts this year but has continued to hedge those bets.  

I won’t bore you with pages of investment theory, but the gap between inflation and interest rates is too wide.  Just like when inflation was 1-2% and interest rates were zero, it was far too narrow.  (In fact, it was inverted.  Leaving your money in the bank assured you of a loss of purchasing power over time.)

While CD buyers and other savers are very happy with the current arrangement, high-interest rates are causing chaos in the real estate and auto sales industry.  High or low interest rates, there are always winners and losers.

It would seem a strategy to lower interest rates slowly as inflation eases would make sense.  My fear for 2024 is that the Federal Reserve maintains interest rates that are too high for too long waiting for their various targets to be reached (and maybe surpassed).

Eventually, the Fed may be forced to lower interest rates more rapidly.  This will lead to artificial gains in both real estate prices and the stock market.   In addition, savers that were relying on the high interest rates of the last year would rapidly lose income, mirroring their problems after the 2008 crash.

There is little that we can do to solve this issue.  It is unlikely that the Federal Reserve governance will revert back to industrial and financial leaders anytime soon.  After 111 years, the bureaucracy is entrenched.

What we can do is use what we know to make better financial decisions in the future.  In addition, we can realize that the people running the Federal Reserve are not financial gods.  Let the rest of the market react to Fed press releases and statements.  We know better.  

If you have any questions or concerns, please don’t hesitate to email us at or call us at (800) 453-3209.  If you don’t already have a copy of my book, The Biggest Financial Mistakes Retirees Make, you can order it on Amazon or click here, and we will get a copy out to you free of charge!

To receive blog updates via email, click here.

This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service.  Statistics and other figures are accurate at the time of original publishing.  Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the reader's own situation or concerns. 

The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.

Always count your change.