This week, monetary policy took center stage. On Tuesday and Wednesday, the Federal Open Market Committee (FOMC) met, licked its collective index finger, held it up in the wind, and then gave instructions on how to intervene in credit markets.
With major stock market indices and home prices near record highs and consumer price inflation still rising, it’s hard to ask for more affordable credit.
Nevertheless, the Federal Reserve cut the federal funds rate for the first time since March 16, 2020. This was during the dark days of the coronavirus panic. And the Fed went big.
Wall Street wanted a 0.50% cut, so the Fed cut rates by 0.50%.
Traders had been waiting all year for this moment. They had been diligently pushing up stock prices for months in anticipation. When it finally came, they reacted like a deer in the headlights.
Stocks immediately surged after the rate cut announcement. But after the initial shock of ecstasy wore off, the major indexes turned red. The DJIA, S&P 500, and NASDAQ all closed the day lower than their opening prices.
On Thursday, after a good night’s rest, the animal spirit returned. After contemplating the glory of the Fed’s mega rate cut, traders began working to push stock prices higher. By the close of trading Thursday, the DJIA and S&P 500 were at record highs. And the NASDAQ was back above 18,000.
Still, there are some people who are difficult to please.
On Monday, Elizabeth Warren wrote: letter To Federal Reserve Chairman Jerome Powell. She told him how bad he was at his job. “Curve behind”She also called for an urgent 0.75% rate cut.
Unfortunately, the 0.50% rate cut wasn’t enough for Warren. She Posted on X: “More rate cuts are needed.”
Carrot and Stick
Elizabeth Warren has a plan for everything. In fact, according to the last calculation, she has 81 plans It’s about the big government solutions that she’s posted on her website. It’s long and extensive. And there’s something for everyone in this plan. Here’s a partial list.
A new farm economy. A fair and equitable cannabis industry. A new approach to trade. Affordable higher education for all. A practical agenda for Black Americans. A practical agenda for Asian Americans, Native Hawaiians, and Pacific Islanders. Fighting digital disinformation. Reforming our bankruptcy system to give people a second chance. How to dismantle Big Tech. Honoring the strength and diversity of our Muslim community. Justice for border communities. Expanding Social Security. Restoring America’s promise to Latinos. Safe and affordable housing. Taxing the super-rich. And much, much more!
Warren is undoubtedly a central planner’s central planner. She plans the economy and organizes society through all sorts of government interventions. The more planning, the bigger the bureaucracy, the better.
In reality, central planning can take many different forms. But regardless of the means and methods, it generally comes down to two things: carrots and sticks. For reasons ranging from naïve idealism to sociopathic control, central planners want to force people to behave in a certain way.
Force. Fraud. Coercion. Anything. In the planner’s mind, the ends justify the means.
One aspect of central planning, one that Warren fully supports, is central bank intervention in credit markets. This was the kind of central planning that the FOMC was doing when it cut the federal funds rate this week.
Market intervention
Central planning, for all its lofty promises, is based on a flawed premise: it assumes that central planners know best.
Central planners like Warren and Powell may believe they know best. Their track record suggests otherwise.
As you may recall, when consumer price inflation hit its highest level in 40 years in early 2021, Powell kept repeating for months that it was “transient.” He was a man with an army of economists at his fingertips. He had colorful charts and pie charts with all the latest data.
Powell should have known what was going on more than anyone else, but he was lost in the dark.
In the case of the FOMC, there is an assumption that an unelected bureaucratic committee knows exactly what interest rates should be fixed at. Interest rates, or the price of credit, are the most important prices in the economy. They affect the prices of all other goods, services, and assets.
But if communist central planners can’t fix the prices of wheat or potato peelers, how can the FOMC fix credit prices?
Credit prices are best left to market participants, much like the price of a hammer or a gumball. In practice, if you don’t like the terms of a loan you’re offered, look for a better one. If you can’t find an interest rate that meets your price goals, it’s time to start saving.
Market intervention always has consequences. Food shortages. Consumer price inflation. Toilet seat shortages. Shortages and oversupplies. Fake jobs. Administrative madness. Bubbles and crashes.
Let the game begin!
The Federal Reserve, the central bank of the United States government, has been in operation for over 110 years. During that time, it has overseen the long-term depreciation of the U.S. dollar and engineered numerous booms and busts.
Typically, the Fed tries to ease the business cycle by dictating the supply of money and credit. Whenever the U.S. Treasury is in a tight spot, the Fed can finance government debt by creating credit out of thin air.
The Federal Reserve’s endless support has allowed the U.S. government to issue far more debt than it otherwise could. The national debt, according to the latest tally, is over $35.3 trillion.
In recent years, debt financing has become increasingly burdensome as interest rates have been set relatively high by the Federal Reserve in an effort to curb inflation.
recent Monthly Financial Statements Washington is expected to run a budget deficit of $1.9 trillion in fiscal year 2024. The key item is the interest on Treasury bonds. In fiscal year 2024, it will exceed $1.1 trillion, far exceeding national defense and health care spending and slightly below Social Security spending.
As you can see, interest on Treasury debt is adding to the budget deficit by a huge amount. Powell is trying to reduce the Treasury’s funding burden by lowering interest rates, which is of course what Warren and others in Congress really want.
They don’t care about the outcome. But we do. And you should too…
What kind of madness will this Fed rate cut unleash?
Christmas meltdown? Double-digit consumer price inflation? Inflating the already overinflated housing bubble? Gold at $5,000 an ounce? Bitcoin at $100,000? AI stocks going to the moon? A new craze for non-fungible token (NFT) art? SPAC fever?
Let the game begin!
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thank you,
MN Gordon
For Economic Prism
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