You might wonder whenever the U.S. economy experiences a slight cough or a terrible case of rheumatism if the Federal Reserve’s proposed monetary cures are effective medicine or a placebo. Over the last 12 months, a few central bankers have let the cat out of the bag that the Eccles Building is developing policy one quarter at a time with no long-term strategy. Since it is failing to plan ahead for future improvements in the fundamentals of the world’s largest economy, the Fed peddles sugar pills to drive up asset prices, giving markets another high to keep the illusion going.
Federal Reserve Bank of St. Louis President James Bullard recently appeared on CNBC to discuss interest rates, the coronavirus, and the U.S. economy. Whether you are the chief bullhorn operator of the End the Fed Brigade or you are a passive critic of the century-old institution, this was a revealing interview. With investors anticipating a quarter-point cut to interest rates at the April Federal Open Market Committee (FOMC), Bullard was asked how a reduction would “cure the flu.”
“Well, you know, you get a cold and you maybe drink more orange juice than you would otherwise. Does that cure the cold? Probably not, but it treats some of the symptoms. So, I think it might help a little bit,” he replied.
He added when discussing the coronavirus:
“There’s a high probability that the coronavirus will blow over, as other viruses have, be a temporary shock and everything will come back.
“If you think the virus is going to dissipate and we’re going to have a temporary shock and everything is going to go back to normal, yeah, I think the Fed is in great shape and we don’t have to lower rates in that scenario.”
In plain speak, Bullard is saying that the Fed’s actions are nothing more than a nostrum that can only sustain the bubble. The sole purpose of the central bank’s existence right now is to maintain asset price inflation in the stock market. The Fed is living one quarter at a time and ostensibly adhering to the John Maynard Keynes school of thought: In the long run, we are all dead. In other words, damn the torpedoes, full steam ahead!
While those at the top have discouraged financial markets from penciling in a rate cut anytime soon, all the signals point to further easing sometime this year. At this point, what does the Fed have to lose? The Dow Jones Industrial Average recently had its worst one-day plunge in two years, so the Eccles Building could prescribe a dose of cheap money to help equities bounce back if the declines persist.
In All Honesty
Recently, the riveting pass-the-popcorn moments in monetary policy seem to be the open candor of Fed officials in recent months. Many of them have gone on an honesty tour, pulling the curtain back just a bit and confirming everything that opponents have claimed for so long. Now, if only a full audit could take place. Until then, we will just have to accept the lack of restraint shown by these guys and gals.
In January, Dallas Fed Bank President Robert Kaplan spoke with Bloomberg News. He candidly noted that artificially low rates and the expansion of the balance sheet are contributing to the meteoric ascent in asset prices. Kaplan stated that when the Fed injects liquidity into markets, “it affects risk assets,” adding that “there is a cost to” the growth in the balance sheet. Plainly, the Fed is driving up asset prices, and this is a massive revelation because too many in the business media dismissed critics who said there was a correlation between higher returns and monetary expansion.
After decades of being a clandestine organization, the central bank is speaking up. Who knows why? Interestingly, it happens at a time when President Donald Trump keeps railing against the Fed, albeit for all the wrong reasons.
Last year, former New York Fed Bank President William Dudley indirectly revealed that the body could make or break presidents when he advocated that the central bank sabotage Trump’s re-election bid.
And yet, Washington lawmakers have been on a relentless crusade against Judy Shelton for daring to violate Fed orthodoxy by being an outsider. Despite disavowing some of her past statements on gold, the Fed, and globalism, Shelton might still be the fresh blood to challenge the raw, omnipotent power central bankers possess.
Don’t Cry for Me, Eccles Building!
The Federal Reserve System has operated in the shadows for far too long. It has lent its support to administrations, despite its claim to independence. It has triggered the booms and busts of the business cycle, despite its limited mandates. It has manipulated economies, distorted markets, facilitated moral hazard, and bailed out foreign banks, despite being an institution that was supposed to support America’s interests. President Trump may be getting the monetary policy file wrong, but he is the first White House occupant to take the Fed to the shredder. In the end, the narrative by the business media and the Democrats is that we should feel sorry for the Fed. Pish posh! Don’t cry for me, Eccles Building.
Read more from Andrew Moran.