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It's time to abandon the naive belief that Chairman Jerome Powell's Federal Reserve is apolitical or data-driven. Neither, and his actions prove it. Political pressure on the Fed has reduced it to just another quivering arrow in the arms of Washington's big spenders.
When Mr. Powell was up for re-nomination, he dutifully kept interest rates below 1% and exploded the Fed's balance sheet with an unprecedented act of money creation, barely keeping it below $9 trillion. In response to a question about raising interest rates by three-quarters of a percentage point in the face of the highest inflation in 40 years, Powell said such a step was unexpected and that inflation was “temporary.” Ta.
But after the Senate confirmed him for a second term as chairman, Powell immediately raised four consecutive three-quarters percent interest rates and began belatedly reducing the Fed's balance sheet to combat runaway inflation. did.
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Why wait until we are reaffirmed to aggressively raise interest rates and reduce the money supply? The short-term effects of such Fed actions tend to be slower economic growth, including higher unemployment.
Federal Reserve Chairman Jerome Powell has a much more political job than people want to admit. Here, he speaks at a press conference after the Federal Open Market Committee meeting held at the Federal Reserve Board in Washington on September 20, 2023. (Photo by Chip Somodevilla/Getty Images)
Turning off the spigot of printed money also tends to burst asset bubbles and expose the problems caused by artificially low interest rates. The series of bank failures in March 2023 were exactly that.
Such emergencies may have derailed Powell's confirmation.
Similarly, if the president had allowed interest rates to rise to their natural level in the face of a multi-trillion dollar federal deficit, government spending would have crowded out the private sector and the economy would likely have ground to a halt. The cost of servicing the federal debt would soon reach stratospheric levels, exceeding today's annual rate of $1 trillion.
By keeping interest rates low for too long, governments and consumers alike were able to build up debt. It stimulated spending but ultimately caused a collapse.
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Powell warned of this very phenomenon in October 2012, saying that artificially low interest rates are “actually encouraging risk-taking and we should stop” because the Fed is creating a “bubble.” Even. If interest rates rise in the future, large losses will occur. ”
Clearly Mr. Powell knew what he was doing, but his choice was as clear then as it is now.
Former President Donald Trump, whose nomination appears to be a fait accompli, has publicly committed to replacing Powell. Mr. Powell's future at the Fed therefore depends on Mr. Biden's reelection.
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A return to low interest rates and money creation is likely to boost economic growth in the short term and avoid serious problems in the banking sector. Of course, this has the lagging effect of reigniting inflation, but that probably won't happen until 2025, after the election.
By keeping interest rates low for too long, governments and consumers alike were able to build up debt. It stimulated spending but ultimately caused a collapse.
The late economist Milton Friedman likened the devil-and-angel nature of money creation to an alcoholic's hangover, which arrives long after the initial buzz. Similarly, the pain of sobriety outweighs the benefits of sobriety.
Mr. Powell should be helping America detox from its cheap money binge, but his motive is to give her hair of the dog in the form of low interest rates and newly created money.
Some may think this is scandalous and innovative, but we often forget that bureaucrats are just as susceptible to incentives as anyone else. And America has been here before. Today's Fed is likely to repeat the catastrophic mistakes of the 1970s.
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When inflation was largely defeated, the Fed returned to money creation. This worsened inflation, necessitated shock therapy from Fed Chairman Paul Volcker, and led to record recessions in 1980 and 1981-82.
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It was as if Mr. Volcker was trying to atone for the cardinal sin of persuading President Richard Nixon to abolish the gold standard nearly eight years ago, the day before he took over the Fed's helm. For the next eight years, while the Star-Spangled Banner hung over the Eccles building, Volker was on board the Jolly Roger. He took no prisoners.
This was probably why even President Ronald Reagan couldn't stand Volcker in 1987 and replaced him with Alan Greenspan. Mr. Greenspan's monetary easing policies ultimately led to the Fed's first too-big-to-fail bailout (Long-Term Capital Management) and the subsequent housing bubble caused by the financial crisis.
People like Powell are the mainstream. Even Volker was an exception later in his career. This is perhaps the best argument for why institutions like the Fed should have as little power as possible.
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EJ Antoni is a financial economist at the Heritage Foundation and a senior fellow at the Committee to Unleash Prosperity.
