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Fed Has a Secret Third Mandate: Mauldin

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Just 100 short days from now, the world will be introduced to the ways of newly-minted Federal Reserve Chair Janet Yellen, assuming she gets confirmed by the Senate. While most acknowledge the former Berkeley professor is inheriting a mess from current chief Ben Bernanke, at least one veteran market watcher already knows what to expect.

"We know what the Fed is going to do [under Yellen]," says John Mauldin, chairman of Mauldin Economics and author of the new book Code Red, How to Protect Your Savings From the Coming Crisis. "They're going to continue to give us, in our generation's parlance, 'more cowbell.'"

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By cowbell, this Texas-based strategist (and apparent Saturday Night Live fan) means liquidity, or a continuation of the money-pumping policies advocated by Bernanke that have seen stocks double since the depths of 2009. Policies, by the way, that Mauldin considers to be necessary and appropriate, even though he believes they have gone on far too long and have left markets addicted.

Given the market-friendly bent of Bernanke — and probably Yellen, too — Mauldin says investors don't need to protect themselves from the Fed as much as they "need to be aware of what's going on."

He goes on to say that Yellen will inherit a Fed that will come with three mandates instead of two, the third being that the central bank is now also supposed to be "responsible for the markets." This new duty, of course, is in addition to its intended role of ensuring price stability and full employment.

Related: How the Fed Safeguards the Financial System

As a result, he says the first sign of economic softening is sure to see Yellen's Fed providing more liquidity, just as the current Fed did. It's a mindset that has become entrenched, and Mauldin blames it on the central bank's leadership, describing them as "12 men [and women] who now feel that they can manage the business cycle...who think they can override the markets and give us a smoother ride."

While that may be beneficial for stocks in the short- and intermediate-term, few serious market observers think the Fed's unprecedented intervention is without risk, including Mauldin.

"I don't think that's ever a good decision," he says of the actual deployment of resources to fulfill its new — and unauthorized — mandate. "In a very perverse way, we're having to pay as much attention to the composition of the Federal Reserve as we do to valuations and earnings and the old stuff."

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