Understanding the Federal Reserve’s Current Landscape

The likelihood of Federal Reserve Chairman Jerome Powell misjudging economic growth, the trajectory of the federal funds rate, and inflation is significantly high, according to our assessment.

What unfolds before us may resemble a futile exercise. The Federal Reserve has positioned itself as the central authority at the helm of this endeavor, focusing on pertinent issues such as the federal funds rate, its balance sheet, economic stagnation, colossal asset bubbles, and the limitations of central planning. So, where do we even start?

Powell’s entry into central banking is somewhat unconventional. Unlike previous chairs, he is not an economist, which is a welcome change from former Fed Chair Janet Yellen, whose academic demeanor often felt detached from practical realities.

Powell, in contrast, is a lawyer who transitioned into investment banking. He wasn’t schooled in the principles of Keynesian economics. However, this does not imply a lack of influence; rather, his understanding has been shaped by a different kind of environment—from the moment he took his first breath.

Born and raised in Washington D.C., Powell knows the intricacies of the capital. He is acutely aware that continually increasing debt is essential to maintaining the functionality of the financial sphere surrounding the Potomac River.

Dedication to Purpose

A few years back, Powell worked as a visiting scholar at the Bipartisan Policy Center, a Washington think tank, earning an annual salary of just $1. His single-minded goal was to persuade Congress members, one at a time, to raise the debt ceiling.

His efforts caught the attention of President Obama, leading to his nomination to the Federal Reserve Board of Governors. President Trump, who is a strong supporter of unrestrained borrowing, quickly took a liking to Powell, dismissing Yellen as soon as he could.

Powell is perhaps the ideal Fed Chair for the current turbulent times. With roots traced back to Alan Greenspan, he truly grasped the purpose behind the position.

In contrast, Ben Bernanke and Yellen believed deeply in the efficacy of monetary policy and genuinely thought their actions were fostering improvement. They missed the larger picture entirely.

Powell possesses a clearer view, understanding that the Federal Reserve’s actions serve two primary goals: one, ensuring a continuous flow of funds to member banks, and two, maintaining a similar flow to Washington. Achieving both aims involves extracting maximum revenue from dollar holders globally.

In straightforward terms, the creation of fiat money by central banks, amplified through commercial banks by fractional-reserve banking, leads to immense financial chaos. This cycle of prolonged money supply expansion, paired with excessive debt accumulation followed by sudden contractions, disrupts the financial aims of both savers and borrowers alike.

Key Points Fed Chair Powell Overlooked

Currently, Fed policy is transitioning from a prolonged period of monetary expansion to a sudden phase of contraction. This shift often results in the financial distress of those who took on excessive debt—ranging from oversized mortgages to superficial wealth displays. In the aftermath, it’s typically the ultra-wealthy who benefit, acquiring assets at bargain prices during this turbulence.

In his inaugural press conference as Fed Chair, Powell correctly announced an increase in the federal funds rate by 25 basis points, bringing the range to 1.5 to 1.75 percent. After discussing inflation, unemployment, and overall economic conditions, he concluded his remarks with these statements:

“Finally, I’ll note that our program for reducing our balance sheet, which began in October, is proceeding smoothly. Barring a very significant and unexpected weakening in the outlook, we do not intend to alter this program. As we’ve said, changing the target range for the federal funds rate is our primary means of adjusting the stance of monetary policy. As always, the Committee would be prepared to use its full range of tools if future economic conditions warranted a more accommodative monetary policy than can be accomplished solely by adjusting the federal funds rate.”

However, Powell overlooked a crucial point: the Fed’s quantitative tightening will result in a substantial influx of government debt flooding the bond market. The pressing question then becomes: Who will purchase this debt? Moreover, how will the Treasury manage its $1 trillion deficit?

While someone will inevitably buy U.S. Treasuries, the questions surrounding their price and yield remain concerning.

We suspect that this deluge of government debt will likely be acquired at a lower price and consequently yield higher returns. These dynamics may escalate as the year unfolds, potentially resulting in the bursting of various cheap credit asset bubbles distorting the current economic landscape.

When the economy eventually begins to contract, or the market experiences a downturn, Powell and the Fed will need to step in as buyers of last resort, flooding the financial system with cheap credit, thereby exacerbating economic inequalities.

This situation is growing increasingly tedious.

Sincerely,

MN Gordon
for Economic Prism

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