The Fed – Out Of Balance

I quote from the St. Louis Fed:

“Keeping our economy healthy is one of the most important jobs of the Federal Reserve. The Federal Reserve System has been given a dual mandate – pursuing the economic goals of maximum employment and price stability. It does this by using a variety of policy tools to manage financial conditions that encourage progress toward its dual mandate objectives – in other words, conducting monetary policy… With stable prices, consumers and businesses don’t have to worry about rising or falling prices when making plans, or when borrowing or lending for long periods.”

The Fed in the recent months has been totally focused on inflation and the need to raise rates and diminish the size of their portfolio to combat inflation. If you read the Fed’s dual mandates quoted above, you will note that “inflation” is not one of their dual mandates. One of them is “price stability,” and inflation is a subset of that mandate, in my humble opinion.

Along with any rise of rates and portfolio diminishment comes higher borrowing costs. This has a serious effect on mortgages, personal bank loans, corporate bank loans, the entire real estate market, the Prime Rate, the cost of our Treasury’s borrowing, the cost of corporate bond borrowing, the cost of high yield borrowing, and also has a slew of other consequences.

I make special reference to the country’s borrowing where our total GDP is approximately $23 trillion and where America’s national debt is approximately $31 trillion. That places our debt at about 26% higher than our entire Gross National Product. The fault here is the government’s, but never forget that while the presidents and governors of the Fed are independent, the Fed as an institution is not. It is part of the government of the United States as mandated by the Federal Reserve Act of 1913.

You should also think of ratings downgrades as borrowing costs go up, as also a rise in bankruptcies, a slowdown in mergers & acquisitions, a decrease in venture capital, a decrease in takeovers, and a decrease in share buybacks all as a result of the Fed raising interest rates like there was no tomorrow to implement their plan. The mad rush by the Fed to get their program done, in my estimation, is an absolute mistake that is going to cause way more harm than good. The Fed is now totally concentrated on raising rates and portfolio diminishment. However, in my view, “price stability” demands a balanced approach to achieve their mandate and objective, and to my mind, there is no balance that is currently being contemplated. This is just a huge mistake.

Aside from all of this, I can easily visualize a recession on the horizon, where the Fed fails in their second mandate of “maximum employment.” U.S. unemployment how stands at 3.7%, and it could easily spike into the 4.50-5.00% range with corporate earnings and profits falling with rising interest rates, and small businesses curtailed by the Fed’s new higher rates. The Fed, in my opinion, is just way out of balance.

The Fed has two mandates – let’s all hope that the Fed remembers and concentrates on both of them. Just one is not enough!

“Capital isn’t just this pile of money sitting somewhere. It’s an accounting construct.”

– Bethany McLean

Original Source: Author

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