This week, monetary policy took the spotlight as the Federal Open Market Committee (FOMC) convened on Tuesday and Wednesday to discuss their strategies for intervening in the credit markets. With major stock indexes and housing prices approaching all-time highs, alongside rising consumer price inflation, the rationale for cheaper credit seemed tenuous at best.
However, the Federal Reserve still opted to cut the federal funds rate for the first time since March 16, 2020, during the initial chaos of the coronavirus pandemic. In a notable move, the Fed implemented a substantial 0.50 percent rate cut.
Wall Street had been anticipating this moment, and traders had tirelessly pushed up share prices in readiness. Yet, upon the announcement, their reactions were surprisingly subdued, reminiscent of a deer caught in headlights.
Initially, stocks surged after the announcement, but that excitement quickly fizzled out, leaving the major indexes—DJIA, S&P 500, and NASDAQ—in negative territory by the day’s end.
By Thursday, however, traders seemed to reassess the impact of the Fed’s bold rate cut. The markets reacted favorably, and by closing time, both the DJIA and S&P 500 had reached record heights, while the NASDAQ rebounded above 18,000.
Yet, amid the celebration, some remained dissatisfied. On Monday, Senator Elizabeth Warren penned a letter to Fed Chair Jerome Powell, criticizing his performance and asserting he was “behind the curve.” She called for a more aggressive 0.75 percent rate cut.
The 0.50 percent cut wasn’t enough for Warren, who took to social media to declare: “More rate cuts are needed.”
Carrots and Sticks
For those unfamiliar, Elizabeth Warren has solutions for nearly every issue, boasting 81 plans for comprehensive government reforms on her website. Her proposals span a wide array of topics. Here’s a glimpse:
A New Farm Economy. A Just and Equitable Cannabis Industry. A New Approach to Trade. Affordable Higher Education for All. A Working Agenda for Black America. A Working Agenda for Asian Americans, Native Hawaiians, and Pacific Islanders. Fighting Digital Disinformation. Fixing Our Bankruptcy System. Breaking Up Big Tech. Honoring Muslim Communities. Justice for Border Communities. Expanding Social Security. Restoring America’s Promise to Latinos. Safe and Affordable Housing. An Ultra-Millionaire Tax. And much, much more!
Warren embodies the archetype of a central planner, seeking to shape the economy and societal structures through extensive government intervention. The more plans she proposes, the greater the bureaucracy in her vision.
Central planning typically hinges on two concepts: carrots and sticks. Motivated by a mix of idealism and control, these planners aim to dictate behaviors.
Methods range from force to fraud, all underpinned by a belief that the ends justify the means. A prominent aspect of Warren’s central planning vision entails manipulating credit markets through central banks, as exemplified by the FOMC’s recent rate cut.
Market Intervention
The foundation of central planning rests on the flawed assumption that planners possess superior knowledge.
Figures like Warren and Powell may be confident in their understanding, but their track records suggest otherwise. Remember early 2021, when Powell, amid surging inflation, insisted it was just “transitory”? Equipped with an army of economists and sophisticated data, he should have had clearer insights, but he was caught off guard.
The FOMC operates under the premise that an unelected committee can accurately determine the ideal interest rate—the most significant price in any economy, as it influences the pricing of all goods, services, and assets.
If communist planners struggled to set prices for basic commodities, how can the FOMC expect to nail down the price of credit?
The determination of credit prices, much like that of hammers or gumballs, is best left to market forces. If the loan terms available aren’t satisfactory, one should shop around. And if suitable options aren’t found, it may be time to save.
Market interventions invariably bear repercussions: food shortages, rampant inflation, scarcity, bureaucratic inefficiencies, economic bubbles, and market crashes.
Let the Games Begin!
Established over 110 years ago, the Federal Reserve has curated numerous economic cycles of booms and busts while facilitating the long-term devaluation of the U.S. dollar.
The Fed typically aims to stabilize economic fluctuations by controlling the money and credit supply. In times of financial strain, the Fed often steps in to finance government debt through the creation of credit.
This ongoing support allows the U.S. government to accrue debt far exceeding regular limits, leading to a current national debt exceeding $35.3 trillion.
Recent elevated interest rates, implemented to combat inflation—largely a product of the Fed’s own policies—have increased the burden of servicing this debt.
According to the latest Monthly Treasury Statement, Washington is projected to encounter a $1.9 trillion budget deficit for the fiscal year 2024. Notably, interest payments on Treasury debt this same year are set to consume over $1.1 trillion—surpassing expenditures for national defense and Medicare, and nearly matching Social Security outlays.
The mounting costs of interest on government debt are significantly widening the budget gap. By reducing rates, Powell aims to alleviate the financial strain on the Treasury—a priority echoed by Warren and other Congressional leaders.
They remain unconcerned about the fallout. However, it’s crucial for the public to take note—and you should too.
What chaos might arise from this phase of Fed rate cuts?
Will we witness a euphoric year-end market surge? Surging consumer price inflation? An even bubblier housing market? Gold skyrocketing to $5,000 an ounce? Bitcoin hitting $100,000? AI stocks soaring? A resurgence of non-fungible tokens (NFTs)? Perhaps another SPAC frenzy?
Let the games begin!
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Sincerely,
MN Gordon
for Economic Prism
