Breitbart economics and finance editor John Carney offers his outlook ahead of the 2024 presidential election in “The Bottom Line.”
Federal Reserve Chairman Jerome Powell spoke on May 1, trying to project an image of mild optimism. But like the Wizard of Oz, the Fed doesn’t want you to draw attention to the real problems behind the curtain. In other words, Fed officials are enabling wasteful government spending that is causing economic hardship. Expected employment statistics and unemployment rate rise.
Frankly, the Federal Reserve has lost its way. Officials don’t know why inflation has spiked again this year or what will happen in the coming months. Due to this uncertainty, they kept their interest rate target unchanged. Powell mentioned “uncertainty” in his remarks, but it would be more honest for Fed officials to admit they don’t really know what’s going on.
The Fed enables reckless government borrowing, tying us and our children to mountains of debt that become more expensive each year. The Federal Reserve began expanding its balance sheet after the 2008 financial crisis. This means increasing the money supply to make borrowing cheaper and easier. This allowed the government to spend like a drunken sailor and suffer no harm. During that time, the federal debt has ballooned to an incredible $23 trillion.
Fed leaves interest rates unchanged as inflation casts doubt on future rate cuts
Typically, when a government borrows an exorbitant amount of money, interest rates rise, making additional borrowing prohibitively expensive. The only reason the Biden administration was able to increase the national debt by more than $6 trillion is because the Federal Reserve creates so much liquidity on its balance sheet.
The Fed is responsible for supporting the surge in federal debt after the 2008 financial crisis. (St. Petersburg)
Although Fed officials do their best to show that their decisions are rational and data-driven, some policies can be extremely destructive. For example, the company announced on May 1 that it would slow the pace of shrinking its balance sheet. But the Fed’s balance sheet is still huge, at about $7.5 trillion. That’s down from a peak of $8.9 trillion a few years ago.
In August 2022, the Fed began shrinking its balance sheet by allowing maturing securities to be “rolled off” of the balance sheet instead of being reinvested. The “balance sheet normalization” plan would allow up to $35 billion in agency debt and mortgage-backed securities (MBS) and up to $60 billion in Treasury securities to be “rolled off” from the balance sheet each month. became.
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The plan has reduced the size of its balance sheet by $1.5 trillion over the past 20 months, but it remains large at $7.4 trillion. Still, Fed officials decided to slow balance sheet reductions by $35 billion per month. In effect, the Fed has reduced the pace of quantitative tightening by more than 50%. At this new pace, its balance sheet will still be a massive $6.9 trillion by the end of next year.
There’s nothing “normal” about it.
Powell mentioned “uncertainty” in his remarks, but it would be more honest for Fed officials to admit they don’t really know what’s going on.
For most of the Fed’s history, the Fed’s balance sheet was less than $1 trillion. As of January 2020, the company’s balance sheet was “only” around $4.5 trillion. This means that even after another year and a half of “balance sheet normalization,” balance sheets will still be about $2.5 trillion higher than they were before the pandemic. This is a 50% increase over the already large number.
Fed officials appear oblivious to or uninterested in the massive expansion of the Fed’s balance sheet over the past two decades. Calling this policy “balance sheet normalization” is a double take.
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By allowing the Fed to maintain a large balance sheet, it would be able to bail out banks and other financial institutions with impunity. They had no repercussions and people largely turned a blind eye when they created $400 billion in liquidity to “stabilize” the financial system in 2023.
Like the Wizard of Oz, Federal Reserve Chairman Jerome Powell doesn’t want investors to see what’s going on behind the curtain. (Photo by Mandel Gunn/AFP via Getty Images/Getty Images)
And with its bloated balance sheet, the federal debt will continue to grow at an alarming rate. Interest payments on the national debt already exceed military spending. It is only a matter of time before Washington’s Fed-led profligacy becomes so costly that severe budget cuts to infrastructure, defense, Social Security, and Medicare become inevitable.
Even today, we are already experiencing sustained inflation as a direct result of such reckless government spending and accommodative Fed policy. Every time you go to the grocery store or gas station, you’re literally paying for these bad insurance policies.
If we want to restore fiscal health, we need to rein in the Federal Reserve and accelerate the pace of balance sheet “normalization.”
Dr. Paul Mueller is a senior fellow at the American Institute of Economic Research.
