It’s Time for the Federal Reserve to Strike

Jerome Powell last night disappointed markets by pushing its interest rate cuts into the distant horizon, his commentary at the press conference after the decision included; “Recent data have clearly not given us greater confidence” and “it’s likely to take longer than expected to achieve that confidence” and finally, “we can maintain the current level for as long as needed”. With inflation out of J Powell's control and no amount of warning from them constraining the Biden government supercharged pre-election deficit spending is it time for the Federal Reserve to sit down and shut up and stop taking the brunt of blame for out-of-control government spending and a deteriorating international backdrop. 

Supply shock and demand pull

Let’s go back to defining the different types of inflation supply shock (wars, droughts) with which inflation rises but monetary policy only exacerbates, and demand pull (fiscal stimulus) which monetary policy does control, but with the backdrop of demand pull raising interest rates will only make inflation worse.

Powell is being criticised for not lifting interest rates enough – with Supply Shock inflation as an additional pre-curser for the current inflation – by lifting interest rates further, monetary policy may add to inflation through both housing and financial services inflation.

Powell is being criticised for not dropping interest rates, but with out-of-control fiscal spending adding to demand pull inflation, by dropping interest rates inflation will rise. 

Powell is a student of former Fed Chairman Paul Volcker – who in the 1970s managed to tame runaway inflation. But this was done with the help and cooperation of President Reagan who when elected saw the effect runaway fiscal policy was having on inflation and tempered government spending to drive inflation back down.

Powell has in no uncertain terms warned Biden that the loose fiscal policy is causing inflation, 2 months ago his comments in a 60-minute interview are ringing bells as CPI continues to climb.

“In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government is on an unsustainable fiscal path. And that just means the debt is growing faster than the economy,”

But Biden has not listened as seen in his recent budget request, the latest round of student debt cancellation adds another $146billion to the deficit and Ukraine, Israel supports adds another $90 billion.

Powell has no partner. Biden’s deficit this year is on track to add $1 trillion every 100 days and with interest rates increasing and interest spending now accounting for over $1 trillion per year, without interest rate drops the U.S. is set to reach $1.6 trillion by 2025 on a revenue of just $5trillion (32%). With ‘mandatory’ expenditure of around $4 trillion per annum this means by 2025 bare minimum government expenditure will see the U.S. go backwards 0.6trillion per annum without any discretionary spending.

Will Trump be a partner to the Federal Reserve

With the Biden government not playing Ball with the Federal Reserve and the election in November this year, with Trump the likely winner, will he be a partner to the Fed? In a recent Washington Post Article Opinion | Devaluing the dollar, one of Trump’s worst ideas yet - The Washington Post. Take with a grain of salt that this article is correct and not just anti-Trump Speculation, Trump is reported to be looking at the possible inflationary idea of devaluing the U.S. Dollar to make U.S. goods cheaper. In Trump’s last term he also slashed tax rates in hope of ‘Trickle Down’ benefits – which has ultimately led to the widening of the wealth gap. Tax cuts are similarly inflationary. So, if indeed these will be the Trump policy – he may not be the partner the Federal Reserve needs. 

*Top 1% share of Wealth in the U.S.

Federal Reserve should just strike

Every time a conference with a Federal Reserve Board members takes place, the market shifts, and international currencies swing. Investors need to remember the Federal Reserve has its hands tied unless they strike, they will be a scapegoat for all the missteps of the government in power. They either gain a ‘partner’ in government or from here there is nothing they can do. Time to strike.