This week, a Federal Reserve insider unsettled many with alarming revelations.
“A strengthening U.S. economy may compel the central bank to raise rates ‘sooner rather than later’ to stay ahead of inflation,” stated Philadelphia Federal Reserve President Charles Plosser on Tuesday.
Meanwhile, Fed Chair Janet Yellen delivered her commencement address to New York University graduates at Yankee Stadium. In her speech, Yellen emphasized that success is more about grit and passion than sheer talent. She referenced former Fed Chair Ben Bernanke’s resilience as crucial during the financial crisis when he opted to support the ailing economy.
From Yellen’s perspective, Bernanke’s extensive monetary strategies were a resounding success. However, for taxpayers, savers, and families managing their budgets, such proclamations can feel incredibly patronizing. When former Treasury Secretary Timothy Geithner remarked, “We did save the economy, but we lost the country doing it,” it left many feeling painfully upset.
We find it frustrating that rewarding recklessness while punishing prudence through monetary policy continues unabated.
The Art of Monetary Policy
To illustrate, interest rates remain at an unprecedented zero, unchanged since the credit crisis’s inception. This policy effectively robs savers while transferring capital to the Treasury. In Yellen’s academic view, this is supposedly for our own benefit.
However, the Fed’s role goes beyond just wealth redistribution from the middle class to bankers. They are also inflating various asset bubbles that bring forth a cascade of economic distortions.
With the DOW and the S&P 500 reaching record highs, the yield on 10-Year Treasuries lingers below 2.55 percent. Furthermore, the Fed’s balance sheet has ballooned by over 400 percent since 2008.
Take fine art, for example. Recently, an anonymous buyer acquired a painting titled Black Fire I for a staggering $84 million. For those unfamiliar, it’s a rectangular canvas split equally in black and white, featuring an additional black stripe. No joke.
This constitutes the kind of extravagant purchase people make when holding onto cash becomes as hazardous as juggling a lit match or a ripe tomato. One must either dispose of the match quickly or risk a burn, just as a tomato can spoil if not used promptly. What else could explain someone spending $84 million on something so simplistic?
The Absurdity of Economic Management
Asset prices have escalated to unfathomable heights. Yet, Plosser’s primary concern involves another type of inflation: soaring consumer prices.
With all the Fed’s “funny money” circulating in the financial system, it’s almost inevitable that this cash will eventually manifest as higher consumer prices. Plosser foresees that an economic upswing will encourage banks to begin lending. Such loans would liberate these reserves from the banks and inject them into the broader economy.
As Jeffry Bartash explains, “The Federal Reserve is sitting on a ticking time bomb that could severely damage the economy unless the central bank acts swiftly to defuse the impending threat.”
Particularly alarming to the Philadelphia Fed President is the $2.5 trillion in “excess” reserves available to individual or corporate borrowers through the nation’s banks. These reserves were created through extensive purchases of U.S. Treasuries and mortgage-backed securities in a practice termed quantitative easing.
Currently, these reserves lie inert in the banking system, largely because demand for loans has been unusually weak amid the slowest economic recovery on record since the Great Depression.
“These reserves are not inflationary right now,” Plosser mentioned at a recent meeting with reporters in Washington.
However, if borrowing surges, and those reserves exit the banking system, Plosser fears that “that’s going to put pressure on inflation.” The end result could see the Fed forced to raise interest rates more aggressively than it desires, potentially undermining the ongoing economic recovery.
This encapsulates the absurdity of attempting to scientifically manage an economy through monetary policy.
Sincerely,
MN Gordon
for Economic Prism
Return from Scientific Management of the Economy is Absurd to Economic Prism
