Bankers’ Reactions Mixed to Fed Jumpstart Attempt

By Andy Meek

A harbinger of rampant inflation. A sign the economy is still not on the right track. A Hail Mary pass.

That’s a sampling of the reaction from Memphis bankers and financial professionals to this week’s news the Federal Reserve Board is effectively printing money to buy $600 billion of U.S. government bonds over the next eight months.

Ironically, the news came the day after this week’s midterm elections, when a tea party-fueled Republican wave crested, tilted the political playing field across the country and demonstrated the anti-stimulus, anti-bailout movement had made itself heard.

The announcement from the central bank means it’s not finished trying to boost the economy, push down long-term interest rates and prod more investors into corporate bonds and stocks.

It also means that by the time Bill Haslam is sworn in as Tennessee’s new governor and as belt-tightening Republicans from North Mississippi to Nashville descend on the nation’s capital, hundreds of billions of new dollars will have been injected into the economy.

Reaction to the controversial Fed move was that it may give the economy a modest bump but that it might also backfire, leaving the central bank out of options at a time when more lawmakers seem keen to let the economy’s pain work itself out.

“My opinion is we should be patient and let the economy recover at its own pace,” said Stephen Rhea, a principal with Summit Asset Management.

Sam Chafetz, a securities attorney in Memphis with Baker, Donelson, Bearman, Caldwell & Berkowitz PC, said the Fed move will lower the cost of borrowing for businesses.

“The fear most noted, of course, is that this extra money – and the spending it is supposed to generate – will fuel a period of inflation,” Chafetz said.

But he also noted that inflation is not a present danger as long as the Fed’s newly created money is effectively stacking up in bank vaults.

“The banks must begin lending,” Chafetz said. “That is the real problem. The banks may have been too liberal in their lending before the financial crisis, but now the pendulum has swung too far in the opposite direction.

“Medium and small businesses are having a very tough time even renewing lines of credit with institutions that have provided them working capital safely for decades. Larger businesses are finding it difficult to convince lenders to provide funding for major capital improvements or for business acquisitions. Unfortunately, there is no tool readily available to the Federal Reserve System to compel banks to be less conservative in their loan considerations.”

FTN Financial chief economist Chris Low said the Fed announcement wasn’t surprising, but that it did include a surprise assessment about the economy. FTN Financial is the capital markets subsidiary of Memphis-based First Horizon National Corp.

The Wednesday announcement “suggests the Fed perceives the economy to be decelerating, not drifting sideways or improving, as many economists think after seeing the most recent data,” Low said.

John Phillips V, the chief investment officer of Red Door Wealth Management, agrees. He also characterized the Fed move as a high-risk gamble that the central bank has the tools to jolt the economy back to life in the absence of robust fiscal policy moves from lawmakers.

“Clearly, what they’re trying to do is manipulate the long end of the yield curve and affect interest rates, push long-term rates down, in the hope mortgage rates come down and it spurs more loans,” Phillips said. “But banks already have huge excess reserves, corporations are holding huge amounts of cash and consumers are de-leveraging and increasing their savings.

“This is something the Fed had to do, but they’re almost out of options at this point.”