Why Tyrion Lannister Could Run Today's Fed

Outrageous title? Perhaps. Outlandish concept. Maybe not. As the Fed navigates it's waythrough the eventual complete taper of its unprecedented monetary stimulus, it will rely more and more on dialogue than blunt instruments, to achieve what it wants. This is where Tyrion steps in. Tyrion Lannister of Game of Thrones fame is superlative in using his wits and his tongue to manipulate to get what he wants eschewing physical violence when he can.

The Fed has adopted a guidance policy after having used quantitative easing to lift the economy out of one of the worst recessions in U.S. economic history. Unfortunately, to achieve its goals the Fed has increased its balance sheet from roughly $900 billion in 2008 to over $4 trillion today. And while the Fed is tapering, that balance is increasing as purchases will continue through year end. Having used monetary tools, the Fed adopted a forward guidance policy that relies more on using Fed statements and the language in those statements to guide markets and their participants while avoiding actual open market operations. With interest rates at zero and an inflated balance sheet, the Fed has little choice but to change tack.

What Could Tyrion Do For the Fed?

Tyrion has used blunt force to achieve his goals, but given his diminutive stature, he is wise to rely on more esoteric means to get what he wants. Not being particularly physically intimidating, it is more fearsome when Tyrion opens his mouth. How could this benefit the Fed? Toady's Fed, and specifically, Janet Yellen, will lean heavily on its zero-interest rate policy (ZIRP) to help guide markets. At its meetings and subsequent press conferences, the Fed will use language in its official statements and press conference dialogue to guide markets with its intentions regarding its Fed funds rate. Ms Yellen would be wise to mimic Tyrion in his attempts to shape kingdoms and influence outcomes of grand conflicts. Tyrion's big crutch is his family's wealth and his ability to cover what seem to be limitless debts. The Fed has even more limitless resources at its disposal and it is this lethal capability that it can hint at when intimating what it still can do to influence the economy and markets.

Tyrion would be less effective in his efforts if he didn't have the weight of his family's name behind him. Equally, if the Fed did not hold sway over instruments that affect global interest rates, it would be less effective in its policies. The idea that the Fed stands by ready to provide support in the event that the economy stumbles is enough to give market participants the confidence to invest and provide liquidity to the capital markets. The characters in George R.R. Martins' massive literary saga are compelled to behave and be manipulated by Tyrion as he tries to protect the realm and his family's position in it. Tyrion knows that he cannot go to war each time he encounters a conflict. Over time it would erode his credibility and resources and the demise of the Lannister reign would ensue. Diplomacy and subterfuge are Tyrion's greatest and most enduring resources.

Janet Yellen's Own Game of Thrones

For better or worse, Ms Yellen follows in the footsteps of one of the most scrutinized Fed Presidents of all time. It will be interesting to follow how Ms Yellen is treated in the wake of what Ben Bernanke faced as the President of arguably the most anticipated Feds of all time. There is print out there that Ms Yellen will be treated more tenderly as she is embraced as a mother figure to many. That may go a little far but the fact that she is well regarded and undeniably a woman is irrefutable. She does have the benefit of taking over the Fed at a time when the bulk of the heavy lifting is behind the Fed and a more hands off approach should be adopted. Ms Yellen is likely to preside over a Fed that is called upon less to save the U.S. economy and more to help soothe markets with its presence and accommodative posture. As Tyrion cannot survive constant war to protect the realm, Ms Yellen cannot exhaust the Fed's remaining resources ad infinitum and will rely on a more esoteric methodology.