Tag Archives: Federal Reserve

Why is the Fed Tightening Credit But Not Money?

Federal Reserve Board Chairman Jay Powell surprised no one on Wednesday by announcing the Fed has raised its target for the federal funds rate another 50 basis points to the 4.25% – 4.50% range. What did surprise the stock markets, based upon the sharp selloff following his remarks, was his statement,

“Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done”

That’s basically what he has said during every public announcement since embarking on an historically steep round of interest rate hikes over the past six months. That this surprised investors indicates how deeply ingrained the “Fed put” has become in the psyche of the financial community. The stock markets continue to fluctuate below their all-time highs, therefore everyone assumes the Fed will announce a “pivot” at the next meeting, since it always in the past.

So, as each meeting approaches, the market begins to rally in anticipation of an announcement or even a hint of said pivot at Powell’s press conference. Then, Powell reads the same statement he has given after every previous meeting and the market sells off.

Needless to say, this is a terrible way for capital to be allocated, even given the existence of a central bank in lieu of a free market. But over a decade of zero interest rate policy (ZIRP) has trained investors to act even more irrationally and for equity prices to become even more separated from fundamentals than they have been in the past.

The Fed’s Balance Sheet

Ironically, Powell made another statement which is demonstrably false and is receiving no attention from investors or the financial media. He said, “In addition, we are continuing the process of significantly reducing the size of our balance sheet.”

The Fed has not significantly reduced its balance sheet. Let’s remember that in August 2019, the Fed’s balance sheet stood at approximately $3.7 trillion, down from its peak of $4.4 trillion 2014-17. The Fed reversed its modest tightening policy and began easing, increasing its balance sheet to $4.1 trillion by February 2020.

Once the Covid-19 lockdowns began, the Fed exploded its balance sheet to over $7 trillion in just three months, eventually taking the total to $8.9 trillion by March 2022.

One would think that “significantly reducing the balance sheet” would mean something more than Powell’s announced plan to reduce it by a mere $45 billion per month June-August 2022 and then by $90 billion per month every month thereafter. But the Fed hasn’t even managed to do that. As of this writing, the Fed’s assets still total almost $8.6 trillion.

In other words, while the Fed has raised the federal funds rate significantly this year, it has not attempted to reduce the supply of money. As a result, M2 has barely decreased since its peak of $21.8 trillion in March 2022. And without decreasing the money supply, the Fed cannot significantly reduce price inflation anytime soon.

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Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?

QT by the Federal Reserve Starts This Month and It Could Get Ugly

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There are some people who think the Federal Reserve is irrelevant in today’s economy. Rather than exerting control, they argue, the Fed merely “chases” the market rate of interest, eternally behind the curve and not having near the effect someone who, say, wrote a book called, It’s the Fed, Stupid might believe.

John Tamny is an example. He agrees with us free market types on most things, but not the Fed. He says the Fed is “a rate follower, not a rate setter.”

I don’t agree on the whole, but there are examples where the Fed is chasing the market, rather than making it, in terms of its interest rate policy. The recent explosion in 10-year Treasury bond yields, well beyond the Fed’s target fed funds rate, and the Fed’s subsequent interest rate increases, is an example.

But since 2008, interest rate policy and control of the money supply are not as intimately linked as they once were, for reasons I explain in today’s episode of Tom Mullen Talks Freedom. For that and other reasons I discuss, we ain’t seen nuthin’ yet in terms of the effects Fed policy is going to have on financial markets and the economy.

Of course, all the Fed is doing is trying to fight the price inflation it caused itself with previous monetary inflation. And if lowering prices was the only effect removing dollars from circulation was going to have, there would be no need to worry about it (the same is true for adding dollars – they could just give us all a million dollars a year!).

The Fed has finally found itself between that rock and hard place Austrian economists predicted they would reach, where there is no good option. Remove money from the economy aggressively and risk dramatic deflation of financial markets and economic malaise or don’t remove money and allow inflation to persist.

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Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?

Did Omicron Really Kill the Economy or Was It Something Else?

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I canceled cable in June 2020. I made that decision for two reasons:

1. It no longer provided value to me. Until Coronasteria, I was able to watch the so-called news programming, filter out the spin and propaganda, and obtain some knowledge of things happening in the world. As of the beginning of the Covid Regime, that was no longer possible.

2. I didn’t want to subsidize evil. That may sound like hyperbole, but it isn’t. And I don’t want a single dollar of mine helping to perpetuate it.

But I still need to know what they’re telling everyone else. So, virtually every morning, I dutifully visit the websites of CNN, ABC, NBC, Fox, etc. and see what today’s menu of falsehoods has to offer.

I’ve noticed what hasn’t been on the menu the past few days: Covid. At least not the screaming headlines we’ve grown accustomed to over the past two years. Instead, most are leading with the news that Old Man Biden killed a BIG TERRORIST (it turns out he blew himself and his family up during a raid by US special forces).

But the most interesting story featured near the top of a mainstream news site was on CNN, which said, “America’s economic recovery is about to go into reverse.”

The White House is preparing for a dismal jobs report on Friday following ADP’s report earlier this week that the economy lost 301,000 jobs in January. The booming Biden economy seems to have hit a speed bump.

The media want to blame the Omicron virus, but that doesn’t make much sense. No businesses were closed because of Omicron. If you want to blame the knock-on effects of the 2020 lockdowns, or perhaps the disruption caused by Biden’s attempted vaccine mandates, that might be more plausible.

Or maybe it’s because the Federal Reserve is so far keeping its promise to slow down quantitative easing (QE) by $30 billion per month through March and end it completely by March 31.

If Jay Powell doesn’t blink first, we may be about to see how much of the post-lockdown recovery was real and how much was merely malinvestment caused by monetary inflation. The answer might be frightening.

If you want to know who really runs the economy (hint: it ain’t presidents or the free market), download a free e-book copy of It’s the Fed, Stupid here.

It’s also available in paperback here. It’s priced at a pre-hyperinflation level so grab a few copies for friends if you can.

It makes a great introduction to the government’s most economically damaging institution for liberals, conservatives, libertarians, socialists, and independents alike.

Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?

The Federal Reserve has crossed the balance sheet Rubicon

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Fed balance sheet (2) Federal Reserve Chairman Jerome Powell tried once more to tell U.S. markets what they wanted to hear, saying the Fed would ‘soon announce measures to add to the supply of reserves over time.”

A little history lesson for my younger readers:

Back in January 2008, the Fed’s balance sheet was approximately $880 billion in assets.Those were mostly securities (exclusively or mostly U.S. Treasury bonds) purchased in the past during monetary expansions (when the Fed buys a security from a member bank, it takes in the security and gives the member bank U.S. dollars, meaning there are more dollars available to lend out into the economy).

During its various rounds of “quantitative easing” and other inflationary programs in the years after the 2008 crisis, the Fed’s balance sheet increased to over $4.4 trillion. This was a once-in-a-lifetime thing, said the Fed at the time, and the balance sheet would quickly be “normalized” when the once-in-a-lifetime crisis was past.

Well, the Fed began normalizing its balance sheet in late 2017 (with the president screaming bloody murder the whole time) and got down to about $3.7 trillion – still over four times what it was in January 2008.

The normalization effort didn’t last long. Despite Powell’s comments, the Fed actually began adding to its balance sheet again in August. It’s now back to $3.945 trillion – a $200 billion increase in just two months. In other words, the Fed just added to its balance sheet in those two months 1/4 of what it added during its first 95 years of existence (1913 – 2008). This in an economy the Fed says is strong.

The Rubicon is in the rear view mirror. Where this monetary mayhem will take us is anyone’s guess.

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Why Aren’t Automation and Baby Boomer Retirements Driving Consumer Prices Down?

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thinkingkid “When I was your age, I used to go to the movies for a dime. I’d get a big bag of candy for a nickel.”

I still remember my father saying those words as I headed off to the movies in the 1970s when the afternoon matinees cost $1.75 per ticket, more than 10 times what my father had paid 35 years earlier. I remember because my father said that every time I went to the movies for my entire childhood and all my teenage years. I doubt I’m alone on this.

There isn’t an American alive for whom steadily rising prices haven’t been a fact of life for all his or her life. Most employed Americans risk their savings in the stock market, through 401ks or other tax-deferred investments, because everyone knows merely stockpiling cash is useless. It will lose all its value because of inflation.

Just imagine if it were the other way around. Imagine if you could simply put your cash savings in the bank, and without even considering any interest it would earn, see it gain value over time. Imagine if your father or grandfather repeatedly told you that something you were purchasing today used to cost him a lot more when he was your age.

Well, for America’s first full century, that was exactly how it was. Prices fluctuated year to year, but over the course of the 19th century, prices fell dramatically. A basket of goods that cost $100 in 1800 cost less than $50 in 1900. That means one could buy twice as much with the same amount of dollars. Average Americans could simply stockpile dollars over the course of their working lives and realize a return on their investment in the form of dollar appreciation.

Read the rest at Foundation for Economic Education…

I, Interest Rate

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interest It is often said, “Don’t kill the messenger,” but that is precisely what everyone seems to want to do in my case. I’m not sure why because the news I bring is neither good nor bad. It is simply the truth; and it is a very sad day when telling the truth can foster such ill will. There are some who go so far as to declare my very existence wicked simply for providing information people use to engage in a specific type of voluntary exchange that, although of immense benefit to society, has somehow acquired an unsavory reputation.

As you may have surmised, I am the rate of interest, the price difference between present goods and future goods. Now, many economists mistakenly identify me merely as the price of borrowing money over time, but that is only one of the many messages I carry. I also represent the price spread in the various stages of production, where capitalists purchase present goods in the form of factors of production in the hopes of selling what is produced by those factors for a higher price than what they spent. I am also this difference in price.

Nobody but me can gather the information I gather, for my message is determined by billions of individual transactions occurring simultaneously all over the economy. I consider the individual supply and demand schedules of hundreds of millions, sometimes billions of individual consumers and producers, along with the uncertainty involved in every time transaction, to determine the current price levels for transactions that involve time at any given moment.

In the case of individual borrowers, the uncertainty I mentioned includes that borrower’s previous behavior, which is generally called a “credit rating.”

The Usury Slander

While it is only one of the many prices I make available to the market, an inordinate amount of attention is paid to the price of borrowing money. That is likely for two reasons. One, as I said, is that most people erroneously believe it is the only information I impart. Two, people seem to be borrowing a lot more than they did previously in history for reasons I will explain shortly. As a result, it is regarding the price of borrowing money where I am most slandered and abused.

Because this price of borrowing is above zero, there are some who consider my existence alone as evil. They say I’m a party to a crime they call “usury,” which is a very strange concept. When everyone is acting honestly, money is a scarce commodity, so any loan by Person A to Person B requires a sacrifice on the part of A. Person A must forego consumption in the present in order to lend to B.

It is no different than if A were saving for a new car or some other expensive item for himself. He must forego eating out as much, or buying new clothes, or going on vacation this year in order to put aside money to buy the expensive item next year.

By loaning money to B, A is allowing B to skip this sacrifice and purchase the expensive item now. It seems a very peculiar notion that A should forego spending his own money on himself only to let B use it for free when needed. How did this obligation to serve B free of charge come about? Aren’t all men created equal?

Read the rest at Foundation for Economic Education…

Thought for the day March 30, 2016 Free Trade, the New Deal and the Federal Reserve

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Thought for the day: Free trade agreements haven’t hurt Americans; they’ve helped. They just aren’t enough to overcome the combined economic destruction wrought by the Federal Reserve System and the New Deal, both of which must be abolished root and branch before there is anything resembling a free market in the USA.

No one really believes the Federal Reserve or the BLS

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Last Friday was anything but good for news on the economy. The Bureau of Labor Statistics (BLS) released a dismal jobs report that missed expectations by fifty percent. This followed a press conference two weeks ago by Federal Reserve Chairman Janet Yellen during which she indicated rate hikes might not come as soon as expected because “room for further improvement in the labor market continues.”

Yellen’s statement would be fairly unremarkable if it were not for one troublesome fact: the U.S. economy is supposedly at “full employment,” according to the measures the Fed uses to guide their interest rate policies. The Bureau of Labor Statistics has it at 5.5% as of today. That is the rate most economists consider full employment for the U.S. economy and we’ve supposedly been there since February.

How could there be room for improvement in the labor market if we’re at full employment? There can’t be. But everybody knows real unemployment is much higher than the manipulated BLS statistics represent. Janet Yellen knows it. The markets know it. Tens of millions of unemployed Americans know it.

Yet everyone keeps talking about the BLS unemployment rate as if it were true.

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

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The Federal Reserve runs the economy, not Congress or the President

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BUFFALO, March 18, 2015 – Janet Yellen told the markets what they wanted to hear today and the indexes rocketed out of negative territory to finish up over 1 %. As usual, speculation abounds on precisely what was in the minds of investors.

Journalists tend to overstate the causal importance of breaking news when the market makes big moves. Often, those moves were predicted months in advance by serious traders and what happened that day had little to do with what the market did. Not true for the Fed’s announcements. They do move the markets immediately.
What most people don’t know, or at least don’t acknowledge, is that the Federal Reserve really runs the entire economy. When the Fed inflates the supply of money and credit, indexes go up, growth occurs and the economy “improves.” When it deflates the supply of money and credit, indexes go down, contraction occurs and the economy “slows.”

That’s really the whole story of the American economy. Think about that for a moment.

It doesn’t matter who is president, which party controls Congress or what any of those people do or don’t do. Yes, regulations and tax rates have some effect on the economy. Liberals might say more regulation is a good thing, conservatives might say it is bad.

But taxes and regulations haven’t really had much effect at all in the past 40 years. Before that, when taxes were at 90%, they mattered, but not when the top rate fluctuates between 35% and 39%. Do the math. It’s not that significant.