Monkey Business

The Federal Reserve System (the Fed) conducts the nation’s monetary policy to promote the effective operation of the US economy. Two of its key objectives (aka, the dual mandate) are to maximize employment and stabilize prices. Since the Fed influences overall financial conditions by adjusting the federal funds rate, another key objective is to moderate long-term interest rates.

Critical to its success, the Fed must anticipate future economic forces that could adversely affect the financial health of US businesses and workers. Only then can corrective monetary policy be applied to keep the economy on the desired trajectory. For example, to achieve price stability, the Fed’s stated goal is to keep inflation at, or near 2% — its so-called target rate. When its economists predict that inflation will rise above 2%, the Fed springs into action by raising the federal funds rate to drive inflation back down to 2%. It is an unglamorous job, but make no mistake, the Fed is run by elites who must be just as smart as the elites who run other important organizations such as the Centers for Disease Control (CDC), the Department of Defense (DoD), and the Department of Homeland Security (DHS).

Wait a minute, you say. The inflation rate rose above 2% (to 2.6%) in March 2021, but the Fed didn’t increase the interest rate until March 2022, when it had increased to 8.5%. Such listless monetary policy execution cannot possibly be the workings of an intelligent individual. True, but consider the individuals who were responsible for the covid lockdowns, the Afghanistan withdrawal, and the illegal immigration fiasco — CDC Director Rochelle Walensky, DoD Secretary Lloyd Austin, and DHS Secretary Alejandro Mayorkas, respectively. Compared to these elites, Fed chairman Jerome Powell is an agile genius.

It is an unglamorous job, but make no mistake, the Fed is run by elites who must be just as smart as the elites who run other important organizations.

Nevertheless, Mr. Powell has painted himself into an extremely dangerous corner. He didn’t see inflation coming. During its rise from 1.4%, when President Biden took office, to 6.2% in October 2021, Powell characterized the increase as transitory. The following month, finally admitting that inflation was not subsiding, he said, “It’s probably a good time to retire that word [transitory] and try to explain more clearly what we mean.” He also promised to “make sure that higher inflation does not become entrenched.” But inflation continued its relentless rise to where, of late, it has become entrenched in the lofty neighborhood of 8.5–9.1%. Now Powell is forced to raise interest rates high enough to drive inflation back down to 2%, without thrusting the US economy into recession. Note that the monetary policies that ended the inflation of the 1970s (which, because of the tax and spend policies of the 1970s, had reached 14% in 1980) resulted in two recessions.

Janet Yellen, Powell’s predecessor, is equally inept at economic forecasting. While serving as president and CEO of the Federal Reserve Bank of San Francisco (2004 to 2010), she was oblivious to the expanding housing bubble and the shenanigans of the too-big-to-fail banks, Fannie Mae and Freddie Mac (to say nothing of the risk-inducing policies of Congress and the Fed itself), that ultimately caused the financial collapse and the Great Recession that followed in 2008, telling the Financial Crisis Inquiry Commission in 2010, “I didn’t see any of that coming until it happened.” As if to reward her incompetence, President Obama appointed Yellen as the Fed chairman in 2014. From there, she went on to become Biden’s Treasury Secretary in 2021, and to not seeing high inflation coming. In October 2021 she, like Powell, told us that the 6.2% inflation was transitory. But at a June 2022 CNN appearance, she said she “was wrong then about the path that inflation would take,” adding that at the time, she “didn’t fully understand, but we recognize that now.” That is, inflation had to explode to 8.3%, its highest level since 1980, before she recognized it.

It turns out that Powell and Yellen are not the only elites who appear to have little ability predicting economic trends and whose efforts “to promote the effective operation of the US economy” appear to be little more than tinkering, like a monkey tugging on the levers of a backhoe loader. In his article “The Fed Can’t Fix the Economy, but It Can Break It,” Jon Wolfenbarger shows that the Fed has a long history of routinely failing at its objectives, and often causing more problems than it solves. Of Fed chairman Alan Greenspan, Mr. Wolfenbarger writes, “He presided over the 1987 stock market crash, the S&L (savings and loan) crisis, the early 1990s recession, the late 1990s tech bubble, the early 2000s recession, and the early to mid-2000s housing bubble.” And Greenspan was called a maestro — not, one hopes, for his interest rate tinkering skills: “In response to the recession he did not see coming, Greenspan slashed the federal funds rate from 6.50% in 2000 to 1.00% in 2003, which helped fuel the housing bubble.”

It turns out that Powell and Yellen are not the only elites who appear to have little ability predicting economic trends and whose management efforts appear to be little more than tinkering.

Ben Bernanke, who took over from Greenspan in 2006, lived in the same world of unawareness as Yellen and Powell. Noted Wolfenbarger: “In June 2008, seven months into the Great Recession, Bernanke said: ‘The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.’” Today, with the previous two quarters registering negative GDP growth, the US economy is in what most economists call a recession, but Powell and Yellen insist that the economy is strong. We are not in a recession, they say, we are in a transition to stable growth. It’s probably a good time to retire that word “recession” as well.

Inflation occurs when there are too many dollars chasing too few goods. It can be reduced by shrinking the money supply through increasing the interest rate (monetary policy) or decreasing government spending (fiscal policy) or increasing the supply of goods and services through decreasing taxes and regulations (fiscal policy), or both. The corner in which Powell finds himself was, for the most part, caused by the policies invoked to combat the COVID-19 pandemic, which did the opposite, in spades: it increased the supply of money and decreased the supply of goods. The two stimulus bills that were passed by Congress in 2020 and 2021 injected more than $5 trillion directly into the economy. In parallel with this spending frenzy, the COVID lockdowns drastically reduced the supply of goods and services by closing businesses and disrupting supply chains. The result: 9.1% inflation in 2022.

Once it sank in that inflation had become persistent, Democrat leaders began to propose measures to counter it. President Biden, for example, tried to reduce gas prices by depleting the Strategic Petroleum Reserve and is considering a gas tax holiday that would temporarily suspend the 18 cent per gallon federal tax. Transportation Secretary Pete Buttigieg suggests replacing your internal combustion vehicle (ICV) with an electric vehicle (EV); the resulting decrease in the demand for gasoline will reduce its price. The success of Buttigieg’s plan depends on the number of people willing to buy an EV (at an average price of about $66,000) instead of an ICV (at an average price of about $48,000). Those who want to do this should do it soon. The inflation rate for EVs is 13.7%. Perhaps Mr. Biden should issue a climate change irony holiday.

With inflation now chronic and a recession looming, it looks as if the Fed’s long history of failing to achieve its objectives will continue.

More recently, Senate Majority leader Chuck Schumer concocted, and Biden signed into law, a $739 billion plan that will increase the money supply (through $433 billion in additional government spending) and decrease the supply of goods and services (through tax and regulation increases). This, in other words, is a plan to increase inflation. According to a letter written by 230 objecting economists, the scheme “would create immediate inflationary pressures by boosting demand, while the supply-side tax hikes would constrain supply by discouraging investment and draining the private sector of much-needed resources.”

With inflation now chronic and a recession looming, it looks as if the Fed’s long history of failing to achieve its objectives will continue. But elite Fed economists are still smarter than monkeys. Confronted with soaring gasoline prices, only a monkey would propose switching to EVs that average Americans can’t afford. Confronted with stagflation, only monkeys would come up with a $739 billion tax and spend extravaganza, and call it the “Inflation Reduction Act.”

Such a simian scheme also extends the Fed’s long history of failing to see things coming. Powell could not have seen the Inflation Reduction Act coming. It means that he must now fight inflation with monetary policy alone. He will get no fiscal help (such as reductions in taxes, regulations, or deficit spending) from Congress and the White House. His only option is to raise interest rates increasingly higher and more often. As economist Kevin Hassett pointed out in his article “How to Fix Inflation,” “while higher interest rates reduce demand for things like houses and cars, they also reduce incentives to create supply. Having the Fed go it alone is a recipe for failure and deep, deep recession.”

And this may be by design. The White House climate change cult is horrified by the CO₂ emissions that would be produced by increased economic growth. Thus, forcing the Fed to drive down inflation, with high interest rates alone, will reduce GDP growth, driving the economy into the hard landing of recession. As I noted in “Recession as Policy,” in the green fantasy world of the Biden administration, “GDP growth is the enemy of climate change”; recession “is as important as windmills and solar panels.”

In stark contrast to its failure in achieving its traditional objectives, the Fed has succeeded in achieving its new ones: bailing out too-big-to-fail banks and irresponsible local governments.

In recent decades the Fed has done a largely inadequate job of controlling employment, inflation, and interest rates. Its main problem is a seemingly innate inability to recognize gathering economic forces that adversely affect the financial wellbeing of average Americans. It’s difficult to understand how devastating economic events such as the dotcom recession or the Great Recession or the present inflationary spiral can mysteriously appear with no warning to highly trained and lavishly paid economists. But none of this matters. The Fed’s futile attempts to achieve its objectives consist of lackadaisically going through the motions — fingers crossed and high powered monetary tools tardily engaged. Nowadays, the heart of monetary policy is not the attainment of employment, inflation, and interest rate targets, but the monetization of reckless congressional deficit spending — a.k.a. money printing.

Congress no longer worries about balancing the budget. If tax revenues are not enough to pay for its grandiose projects, it can borrow the rest by issuing Treasury bonds — massive debt that the Fed will purchase with alacrity. The three objectives that I listed at the beginning have been subsumed by two new objectives: bailing out big banks, and bailing out profligate government. Of the former objective, Wolfenbarger wrote, “The Fed’s real purpose is to enable banks to make loans by creating money out of thin air and then to bail them out when their loans go bad.” Of the latter objective: “The Fed’s other main purpose is to help the US government borrow.”

In stark contrast to its failure in achieving its traditional objectives, the Fed has succeeded in achieving its new ones. Not only did it bail out too-big-to-fail banks during the Great Recession, but during the covid pandemic it expanded its role (and probably its charter) by bailing out small and mid-size businesses, large (non-bank!) corporations, and fiscally irresponsible local governments. As to government borrowing, a World Bank study found that once a nation’s debt-to-GDP ratio reaches 77%, its GDP growth is adversely affected; in particular, that “each additional percentage point of debt above that level reduced annual real growth by 1.7%.” Thanks to the Fed’s debt monetization operations, the US debt-to-GDP ratio has more than tripled in the past 40 years, to over 120%.

By simply creating new money whenever Congress extends its grasping hand, the Fed has been wildly successful at expanding and perpetuating government largesse. Dangling money before spendthrift politicians, hungry for immediate popularity, is a job that actually could be accomplished by monkeys.