Monetary policy took center stage this week. On Tuesday and Wednesday, the Federal Open Market Committee (FOMC) huddled up, licked their collective index finger, held it up to the wind, and then commanded how they would intervene in credit markets.
With the major stock market indexes and housing prices near all-time highs. And with consumer price inflation still rising. These are hardly the conditions that demand cheaper credit.
Nonetheless, the Federal Reserve cut the federal funds rate for the first time since March 16, 2020 – during the dark days of the coronavirus panic. What’s more, the Fed went big.
Wall Street wanted a 0.50 percent rate cut. Thus, the Fed delivered a 0.50 percent rate cut.
Traders had waited all year for this moment. They’d diligently bid up share prices for months in anticipation. When the moment finally arrived, they reacted like a deer in the headlights.
Stocks immediately jumped following the rate cut announcement. But after the initial hit of ecstasy wore off the major indexes turned red. The DJIA, S&P 500, and NASDAQ all closed out the day below where they started.
By Thursday, after a good night’s rest, the animal spirits returned. Traders, having pondered the glory of the Fed’s supersized rate cut, went to work, bidding up share prices. By market close on Thursday, the DJIA and S&P 500 were sitting at record highs. And the NASDAQ was back above 18,000.
Still, some people are hard to please.
On Monday, Elizabeth Warren wrote a letter to Fed Chair Jerome Powell. She told him how terrible he was at his job. That he was “behind the curve”. She also demanded a 0.75 percent rate cut posthaste.
Alas, the mere 0.50 percent rate cut wasn’t good enough for Warren. She posted to X: “More rate cuts are needed.”
Carrots and Sticks
Elizabeth Warren, if you didn’t know, has a plan for everything. In fact, at last count, she has 81 plans for big government solutions posted to her website. They’re long and extensive. And there’s something for everyone inside these plans. Here’s a partial list:
A New Farm Economy. A Just and Equitable Cannabis Industry. A New Approach to Trade. Affordable Higher Education for All. A Working Agenda for Black America. A Working Agenda for Asian Americans, Native Hawaiians, and Pacific Islanders. Fighting Digital Disinformation. Fixing Our Bankruptcy System to Give People a Second Chance. How We Can Break Up Big Tech. Honoring the Strength and Diversity of Muslim Communities. Justice for Border Communities. Expanding Social Security. Restoring America’s Promise to Latinos. Safe and Affordable Housing. Ultra-Millionaire Tax. And much, Much MORE!
Warren, no doubt, is a central planner’s central planner. She wants to plan the economy and order society via government intervention of all stripes. The more plans. The bigger the bureaucracy. All the better.
Indeed, central planning can take on many different forms. But regardless of the means and methods, it generally comes down to two things: carrots and sticks. For reasons that range from naïve idealism to sociopathic control, the central planners want to compel how people behave.
Force. Fraud. Coercion. You name it. In the planner’s mind, the ends justify the means.
One aspect of central planning, one that Warren wholeheartedly supports, involves intervening in credit markets by central banks. This was the variety of central planning the FOMC was up to this week when it cut the federal funds rate.
Market Intervention
Central planning, with all its high promises, is based on a flawed premise. It assumes the central planners know best.
Central planners like Warren and Powell may believe they know best. Their track records tell us otherwise.
If you recall, in early 2021, as consumer price inflation was headed to a 40-year high, Powell repeated for months that it was ‘transitory.’ This was a guy with an army of economists at his fingertips. He had colorful charts and pie graphs with all the latest data.
Powell more than anyone else should have known what was going on. Yet he was lost in the dark.
In the case of the FOMC, there’s the assumption that an unelected committee of bureaucrats knows precisely what the rate of interest should be fixed at. The rate or interest – i.e., the price of credit – is the most important price in an economy. It influences the price for all other goods, services, and assets.
Yet if communist central planners were incapable of properly fixing the price of wheat or potato peelers, how can the FOMC possibly get the price of credit right?
The price of credit, like the price of hammers or gumballs, is best left to market participants to decide. Practically speaking, if you don’t like the terms and conditions of a loan that are offered, shop around for something better. If you cannot find a rate that meets your price target, then it’s time to start saving.
Market intervention always comes with consequences. Food shortages. Consumer price inflation. Scarcity of toilet seats. Supply dearths and gluts. Pretend jobs. Administrative insanity. Bubbles and busts.
Let the Games Begin!
The Federal Reserve, the central bank to the U.S. government, has been in operation for over 110 years. During this time, it has engineered numerous booms and busts, while overseeing the long-term debasement of the U.S. dollar.
In general, the Fed attempts to moderate the business cycle by dictating the supply of money and credit. Whenever the U.S. Treasury is in a pinch, the Fed can also be counted on to finance government debt with credit created out of thin air.
This endless backing from the Fed has allowed the U.S. government to issue much more debt than it otherwise could have. At latest count, the national debt is over $35.3 trillion.
The relatively higher interest rates over the last few years, to contain the inflation of the Fed’s own making, has made financing the debt increasingly burdensome.
The latest Monthly Treasury Statement shows Washington is on track to run a $1.9 trillion budget deficit for the fiscal year 2024. Of note, is the line item for interest on Treasury debt securities. For FY2024, this will eclipse $1.1 trillion – putting it well above outlays for national defense and Medicare, and only slightly below social security.
As you can see, interest on Treasury debt is massively blowing out the budget deficit. By cutting rates, Powell is working to reduce the Treasury’s financing burden. This, of course, is what Warren and others in Congress are really after.
They don’t care about the consequences. But we do. And so should you…
What madness will this round of Fed rate cuts incite?
A year-end Christmas melt-up? Double digit consumer price inflation? Will it pump up an already over inflated housing bubble? $5,000 per ounce gold? $100k bitcoin? AI stocks to the moon? A new mania for non-fungible token (NFT) art? SPAC fever?
Let the games begin!
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Sincerely,
MN Gordon
for Economic Prism
