• 265 days Could Crypto Overtake Traditional Investment?
  • 270 days Americans Still Quitting Jobs At Record Pace
  • 272 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 275 days Is The Dollar Too Strong?
  • 275 days Big Tech Disappoints Investors on Earnings Calls
  • 276 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 278 days China Is Quietly Trying To Distance Itself From Russia
  • 278 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 282 days Crypto Investors Won Big In 2021
  • 282 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 283 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 285 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 286 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 289 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 290 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 290 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 292 days Are NFTs About To Take Over Gaming?
  • 293 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 296 days What’s Causing Inflation In The United States?
  • 297 days Intel Joins Russian Exodus as Chip Shortage Digs In
Kelsey Williams

Kelsey Williams

Gold Analyst  Kelsey's Gold Facts Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial…

Contact Author

  1. Home
  2. Markets
  3. Other

New Fed Chairman, Same Old Story

President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.

Where we are today is the culmination of decades of irresponsible financial/fiscal policies and a complete abdication of fundamental economics. But that should not be a surprise. The self-proclaimed purpose of the Federal Reserve Bank is to manage the economic cycles. This is an impossibly presumptive task and a violation of fundamental economic theory.

In addition, the Federal Reserve Bank is also charged with ensuring the financial operation of the US Government.  Or, in other words, maintaining their (the U.S. Government’s) ability to borrow money by issuing more and more debt in the form of Treasury securities. In my opinion, this is the sole and overriding purpose behind the existence of the Federal Reserve. And it drives every decision they make.  It is not about the economic effects of their policies on US citizens (individually or collectively).  It is all about keeping the U.S. Government solvent.

The US Government is not solvent, of course, but maintaining and reinforcing the confidence in their financial viability is absolutely essential.  And nothing else takes precedence.

In the late 1970s the effects of government inflation threatened to cripple the US dollar and bring the US economy to its knees.  U.S. Treasury Bonds were losing value faster than most stocks, which were also declining at precipitous rates.  Actions taken at that time averted disaster – temporarily.  We have had periods of relative stability since; as well as more volatility and financial crises. The cycle continues. And things will get worse.

The US dollar is in a state of perpetual decline (by intention) which will ultimately end in complete repudiation.  Whether or not the Federal Reserve continues to raise interest rates is not the real issue.  They will do – or not do – whatever they think will keep the charade going for a while longer.

But the point of no return has been passed. We may well see more periods of relative financial and economic stability. However, regardless of whether or not we do, we will continue to see the US dollar decline in value/purchasing power and we will be subjected to more erosion of our economic freedom by virtue of more regulations and restrictions. (This is true even without Janet Yellen’s endorsement of financial regulation in her recent speech at Jackson Hole, Wyoming.)

The US Federal Reserve Bank does not control interest rates.  They definitely can influence the direction and level of nominal interest rates by their actions and verbiage regarding the Fed Funds rate  (the rate that member banks of the Federal Reserve System charge each other to borrow funds on a overnight basis) and the Discount rate (the rate that the Federal Reserve charges member banks to borrow funds directly from the Federal Reserve). By virtue of their efforts they hope to  encourage economic activity that meets their objective of “managing the economic cycles”.

Interest rates are determined in the market place. Investors buy and sell bonds continually, all over the world. The transaction price for a bond is determined by an agreed upon yield (interest rate) between the buyer and the seller. If investors are suspicious about the credit worthiness of the bond issuer, or are concerned about effects of higher inflation, then they tend to want a higher yield/return for tying up their money for a longer period. Hence, bond prices would decline until interest rates reach a higher level that is acceptable to both buyers and sellers.

So why has the bond market responded so willingly to the efforts of the US Federal Reserve Bank?  Why have we not seen a similar response from the bond market such as that cited above regarding the 1970s?  There are a couple of reasons.

For one thing, the Federal Reserve Bank has purchased a lot of debt since the crisis of 2008.  They have actively acquired various debt securities and their purchases helped stem the aggressive selling of various bonds.  Also, it is quite possible that bond holders do not see as much risk involved (especially interest rate risk on a projected basis) and are more patient – or more naive.

In addition, foreign governments are among the largest holders of US Treasury debt. Hugely so. Trying to sell seemingly small amounts of their own holdings would still be large enough amounts to be disruptive to daily trading and would likely feed any weakness in the market causing further erosion of their own remaining holdings.  And this is in light of the fact that the US Treasury Bond Market is the largest financial market in the world.

Finally, cheap credit is a money drug which has, for the most part, had its intended effect – to goose economic activity. Nobody wants to give back.

Unfortunately, the Federal Reserve’s efforts have brought us to a point which is not very ‘manageable’.  If interest rates continue to rise from here, it could likely usher in a period of withdrawal – financially speaking.  We might see a huge implosion of the debt pyramid accompanied by a collapse in the nominal US dollar price of all assets (stocks, bonds, real estate, commodities, etc.).

And maintaining interest rates at artificially low levels will eventually result in rejection and repudiation of the US dollar. The continual injection of drug money could kill the patient. More likely sooner, rather than later, too. The Fed knows this. And whether the Chair is Janet Yellen or Jerome Powell, they have their hands full.

Currently, the Fed is attempting to steer a course between two alternatives; neither of which are acceptable. Hence, we get incremental, irregular increases in the discount rate coupled with efforts to begin (passively) to unwind their massive balance sheet.

There is an additional problem.  The Fed knows that the reason they are falling short of their intended 2% inflation target is because their efforts at priming the pump are not having the intended effect.  Each successive infusion of money and cheap credit has less and less impact. The patient is showing signs of rejection.

Stock, bond and real estate prices have benefited from the hugely inflationary expansion of money and credit over the past 8-10 years. But their prices do not reflect true fundamental value. This is particularly true of bonds and other debt securities. Hence, they are more vulnerable to large-scale declines.

Now people expect the Federal Reserve to solve a problem which they – the Federal Reserve – created. They can’t.

Any changes of note – which are considerably different in terms of Federal Reserve policy or activity in the financial markets –  will be rooted in negative circumstances. In other words, actions will be taken in order to prevent or avoid economic calamity or in response to it.

Until such a time, the descriptive term applicable to the Federal Reserve is ‘status quo’.

By Kelsey Williams

Back to homepage

Leave a comment

Leave a comment