EDITOR NOTE: Now that the Fed has rewritten the rules in its interventionist textbook, we can rest assured going forward that it may never run out of bullets, so to speak. Not unlike a wildfire, its “expansionary” policies have jumped the boundaries of monetary concern over to that of potential market control. What’s next after printing money to buy corporate debt--purchasing stocks, or bringing interest rates to negative territory? Inflation is bound to wreak havoc on American households, particularly those looking to retire on more conservative fixed income investments in the coming years. The cost of living is going to get even more expensive, perhaps unaffordable to many. Meanwhile, the Fed, in addition to its monopoly over the dollar and its power to choke off your purchasing power, may soon have the markets surrounded.
The Federal Reserve has potentially had the most memorable year in its more than a century–long history. What started out as a year of "Will they or won't they cut interest rates?" blossomed into a time of slashing rates to near zero, unleashing unlimited quantitative easing, purchasing corporate and municipal bonds, and growing its balance sheet to a record high. Now, as the economic consequences from the covid-19 pandemic linger, the Fed has taken advantage of the crisis to modify its policies to be more expansionary—which will inevitably blow bubbles and wreak havoc on households everywhere.
The Jackson Hole Shift
Fed chair Jerome Powell delivered prepared remarks during the annual Jackson Hole symposium. Powell virtually announced a historic policy shift in the way the US central bank approaches inflation. The standard policy had been that when inflation climbs, the central bank raises interest rates to curb it, much like what happened in the 1980s. The Fed is no longer utilizing this strategy. Instead, it is damn the torpedoes and full speed ahead.
According to “robust adjustments” to the Statement on Longer-Run Goals and Monetary Policy Strategy, the Powell-led institution will embrace average inflation targeting. This will enable the Fed to let inflation run above the 2 percent target rate after periods when it has come in below that level. Now that the Fed no longer feels compelled to raise rates when inflation surges or the unemployment rate drops, is there a specific number the Eccles Building needs to anticipate? No. Powell stopped short of listing what jobless and inflation rates he would prefer to see, choosing to allow the market to determine what is too much inflation and what is full employment. He also did not say what would happen if inflation increases beyond what the Fed would like.
Many find it counterintuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy. [The situation] can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.
We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome. We want to do what we can to prevent such a dynamic from happening here.
Powell was short on a lot of details, but what we do know this heralds: more inflation and low rates.
What This Means for You
The 2 percent inflation target rate had already been a befuddling and arbitrary figure in the first place. There is practically no theoretical justification for this number other than some schemer using it to advance the cause of the interventionists. It is more of central planners tossing random numbers, something that former Fed chair Paul Volcker admitted to in his book, Keeping at It: The Quest for Sound Money and Good Government. But the Fed lifting this target is bad news for everyone.
Seniors nearing retirement typically transition into more conservative investments as they head toward their winter years, such as bonds and cash deposits. With interest rates at near zero, the returns would hardly be enough for retirees to keep up with ballooning living costs. If it is bad now for the millions of older adults out of the workforce, think about what will happen when inflation is allowed to go higher for longer.
When the Fed slashed interest rates by 150 basis points during the market meltdown in March, the organization injected trillions of dollars in cheap money into the equities arena. The move allowed the stock market to not only reclaim its milestones but also to touch record highs. The consensus is that the Nasdaq Composite Index is in a bubble, and the longer rates stay lower, the more significant asset inflation will be—and the massive amount of damage that will occur once the Fed tightens policy. Does this mean the stock market will go up forever? Perhaps that is the objective of the Powell Putsch.
As rates stay suppressed, borrowing will be stimulated. This means consumers and corporations will take on more debt, which will be critical for the survival of a lot of households and businesses due to soaring price inflation. The entire economy will eventually be based on debt. And, as Liberty Nation reported last year, a study revealed that the gross domestic product (GDP) would crater if borrowing were outlawed tomorrow.
The US dollar has already collapsed 12 percent since the Fed embarked upon an extraordinary money-printing campaign to cushion the economic blows from the covid-19 public health crisis. While it is unlikely the greenback will lose its reserve currency status any time soon, the fiat money’s days are numbered. The Fed’s latest Frankenstein experiment will be a contributing factor to the buck’s demise.
The Next Monetary Frontier
If you thought the 2007–09 response by Ben Bernanke and his Federal Reserve System was extraordinary, you have not been paying attention to what is currently happening under Powell’s watch. A zero interest rate policy, unlimited asset buying, Wall Street bailouts, and now guaranteed inflation. This is a never-ending monetary accommodation that leaves you asking: What else will the Fed do after inflation averaging? At this point, the only actions left for the Fed are to buy stocks directly and to bring interest rates to below zero. Of course, nobody would have thought Jerome Powell and associates would defy textbook monetary policy and opt for higher inflation. Forget the fake news industrial complex. The Federal Reserve is the enemy of the people.
Originally posted on Mises Institute