According to the Federal Reserve Act, in which Congress created the Federal Reserve System back in 1913, the U.S. central bank was given the following statutory objectives for conducting monetary policy: maximum employment, stable prices and moderate long-term interest rates.
The Fed has since given itself an additional mandate: market stability. Congress didn’t grant the Fed that power, but that seems to be the Fed’s overriding concern lately. In the process, it’s succeeded in creating what some very smart people believe is the biggest bond bubble of all time, and a pretty big one in equities, too. It’s pushed more and more of the country’s wealth into the pockets of the so-called 1%. It’s also given some people a false sense of financial security that the Fed has created a floor – a guaranteed return, if you will – under which investment returns will not be allowed to fall.
Over the past several years, it seems that just about every Fed monetary policy decision hasn’t been made to stabilize prices or to boost employment growth – it’s pretty much already accomplished those things. Rather, every Fed action – or inaction – is done solely to shield investors and traders from losses.
Loretta Mester, president of the Cleveland Fed, brought this subject up the other day, although the speech hasn’t gotten as much publicity as it deserves. The fact that she made it in faraway Australia, based on a speech she made in June in faraway Sweden, may have had something to do with it. But her comments raise questions about Fed overreaching well beyond its legal mandate that few people seem to be asking.
“In my view, a central bank should care about financial stability to the extent that it affects the health of the real economy,” Mester said. “Volatility or minor disruptions in financial markets that represent the ebb and flow of a dynamic economy but do not threaten the health of the economy are not something the monetary policy authority should respond to. I do not believe financial stability should be added to the Fed’s statutory monetary policy goals of price stability and maximum employment.”
Yet that is exactly what the Fed has been doing, and it hasn’t been bashful about telling us that it is.
Last December, the Fed was supposedly on the road to normalizing interest rates when it raised the federal funds rate by 25 basis points. That was supposed to be followed by a series of gradual rate increases. In fairness, the Fed never actually said what the frequency of those rate hikes would be, but reasonable people could assume from Fed indications that it meant at least every other Fed meeting.
Yet here we are at the end of July and there has been no follow-up. Since then, there have been four Federal Open Market Committee meetings, none of which has ended with a rate increase.
Instead, we’ve gotten one excuse after another about why it just wasn’t the right time to continue the path toward normalcy, many of which haven’t had anything to do with its legal mandates.
Prospects for a rate increase at next week’s FOMC meeting don’t look very promising, coming on the heels of the Brexit vote. The September 20-21 meeting may be more likely, but it’s also still too close to Brexit for the Fed’s liking and just six weeks before our president election. The next meeting after that is November 1-2. Do you really believe the Fed is going to make any move just one week before the election?
Rather, it seems that the Fed has decided it won’t take any action that might cause even the slightest pain or inconvenience to investors or instability in the markets. The nanny state mentality has taken over Fed thinking.
“In the U.S., people who are 80 years old have lived through two major financial crises (the Great Depression and the 2008 crisis),” Mester said in the prepared text of her Australia speech. “Is that too many? Would we rather lower the probability of such an event to one every 1,000 years? What would we be willing to give up to do that?”
I doubt that the Fed is looking that far ahead, but it does appear that the Fed is willing to have the other 320 million of us continue to live in a stagnant, low-growth economy, with a permanent underclass of millions of unemployed and underemployed people, where consumers can’t get any kind of return on their savings, rather than risk returning monetary policy to normal. Never mind living under the constant fear of when the asset bubble is going to pop.
I doubt that’s what the creators of the Fed had in mind. Then again, the Fed wouldn’t be the first government entity that overreached. Maybe it’s time Congress revisited the Federal Reserve Act and made the Fed stick to its mandates.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.