Jerome Powell just earned himself a nomination to a second term as head of the Federal Reserve. The White House confirmed Monday that President Biden will reappoint Powell.
Some market watchers thought Lael Brainard might get the gig (it would have offered the President an opportunity to appoint a woman as well as someone who was expected to be highly focused on bank regulation and climate change) but, instead, Brainard is being nominated for the role of Vice Chairman…with Powell continuing on in the top spot.
But, let’s be clear: it would not have mattered much to the markets who got the top job. Both bankers have already drunk the kool-aid. Both bankers believe that printing money is the solution to ensuring economic prosperity. And, both bankers…are wrong.
The Fed to the Rescue
In fairness, back in March 2020 at the height of the pandemic, the Fed did what it needed to do. Our economy had been shut down in a desperate move to curb the spread of the coronavirus. The Fed stepped up to the plate and shoveled liquidity into the system at a record rate — all to help ensure that borrowing and our financial markets remained intact.
The Fed purchased $120 billion in government-backed mortgages and treasuries per month, every month and that money helped alleviate what could have been tremendous economic pain for the nation. By enabling so much liquidity, the Federal Reserve prevented the U.S. economy from spiraling into a massive, decade-long recession reminiscent of the Great Depression or worse. It was the right thing to do.
But that was then…and this is now.
At present, our economy has recovered. We have opened up for business and companies are reporting record earnings. Americans are shopping, traveling, and going about their daily lives with renewed vigor. So, why keep printing? Why leave interest rates at historic lows? Why not return to business as usual at the Federal Reserve, just as our economy has as a whole?
Because the Fed knows that we’re addicted to easy money.
An Easy-Money Addiction and Once-in-a-Generation Inflation
If Central Bankers were to turn-off the spigot too soon, they might risk a pullback in the stock market. And no one wants that. So, although the Fed began its taper process earlier this month, it’s still buying up tens of billions worth of securities.
All this bond buying for the last year and a half has resulted in one thing: inflation.
And, we’re not talking just a little inflation. Nope. This is a once-in-a-generation-style kind of inflation. The kind where home heating fuel costs 59% more than this time last year, natural gas is up 28%, gas prices up more 50%, bacon costs 20% more and the price of eggs increased 12%. This is what you call extraordinary inflation–the kind of which we haven’t seen in 30 years.
Given that Powell will stay on in his position (he’s expected to pass his Congressional hearings without an issue) we can all anticipate more of them same. That means, more money printing and even more inflation.
It’s a problem considering the very group that Powell and other Central bankers as well as lawmakers say they’re trying to help (middle-class and poor Americans) — well, that’s the group most hurt by rising prices. After all, wages haven’t gone up as much as inflation. IF wages increase 1% but, consumer prices jump 6.2%, then real wages are considerably lower.
In fact, the group that benefits most by aggressive Fed policies is the upper class — people with capital to invest. The people with the money already. Indeed, the stock market keeps moving higher, just as real estate prices continue moving higher.
Perhaps the Fed believes there’s no other way to manage the economy. After all, if the Fed pulled back too quickly and stocks sunk, businesses stumbled, and the economy contracted…well, that wouldn’t be good for anyone! But, couldn’t there be a happy medium?
As Jerome Powell begins his second term as chairman of the world’s largest and most prestigious Central Bank, he would be wise to scale back on his bond buying and even–dare I say–even consider an eventual move higher in interest rates. The dangers of leaving rates too low for too long…combined with making money so easily, readily available through the Fed’s ongoing bond-buying liquidity push…has serious risk that are significant and perhaps not even entirely yet known.
Remember how low interest rates helped encourage a giant party in the subprime mortgage space? An environment in which banks would literally lend to anyone? The Fed and its aggressive policies played a role in enabling the banks to go so far out on the risk curve. (In fairness, the financial industry, Congress, and individuals themselves were all at fault, as well.) How do we know a similar bubble isn’t brewing all over again?
Though, this time the culprit might not be NINA (no income no assets) loans but rather a meme coin that you haven’t even heard of yet (since they keep sprouting up almost daily.)
While it’s difficult to know when the bubble will burst, we should all recognize that if the Fed doesn’t get out of the bond-buying business fast, we will all one day pay the price.