by Pierre G. Villere
The Federal Reserve Bank may very well have a more direct influence on our business lives than any other federal agency, and it is does so quietly in the background while wielding an enormous economic stick. It has a number of tools and mechanisms at its disposal to manage inflation and promote employment, the most well-known of which is the ability to set interest rates across the board. High interest rates of years past served to bring inflation under control, and until the onset of the Covid pandemic, it held inflation at its stated target of around 2 percent. When the pandemic struck, it reached into its toolbox and unleashed another mechanism, which is known as its open market operations (OMO). This involves the Fed buying or selling Treasury bonds in the open market, and this practice is similar to directly manipulating interest rates in that OMO can increase or decrease the total supply of money, a move which also affects interest rates. The logic of this process is rather simple.
If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase. So, OMO has the same effect of lowering rates when increasing the money supply, or raising rates when decreasing the money supply, which is a direct manipulation of interest rates.
While the Fed has been flooding the market with liquidity throughout the pandemic, the rise of the Covid Delta variant has complicated the economic outlook by creating renewed risk of a sharper economic slowdown at the very moment some officials were ready to reduce, or taper, the pace of monthly bond purchases. Growth in consumer spending slowed in July to 0.3 percent, less than a third of June’s spending increase of 1.1 percent and less than economists had projected. Spending on services grew, while spending on goods declined. And of course inflation is growing strongly, although Fed Chairman Jerome Powell is convinced that it will fall back when the economy settles down to normal, a view we share.
The Fed has a tricky balancing act and has done a great job of managing the economic impact of the pandemic. Based on recently reported metrics, it is having a positive impact on the concrete industry.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected] Follow him on Twitter – @allenvillere.
A PERSONAL NOTE ON HURRICANE IDA
Sixteen years ago this past August 29, Hurricane Katrina unleashed its wrath on New Orleans, which is where our firm is headquartered, and where I have called home all of my life. On that anniversary, an equally vicious Hurricane Ida visited her destructive winds on us, then continued through the eastern U.S. and impacted populations as far north as New York. We are now reliving the nightmare of a multi-year recovery. Here are the exact words I wrote in thanks to my readers 16 years ago, and am gratefully repeating:
Fortunately, our office and all of our employees’ homes are safe and sound, but electricity, cable television, Internet connections, and cellphone and land line communications have all been slow to be restored, despite a Herculean effort by utility crews from all across the nation and Canada. Throughout all of this, I have been inundated by calls and emails from friends, clients, and colleagues throughout this industry, many of whom have offered their guest rooms and their homes to my family, for which we are eternally grateful. This industry is blessed with some of the finest and most wonderful people I have ever met, and I am lucky to call so many my friends. Thanks to all of you for your generosity and thoughtfulness throughout this ordeal.