Tag Archives: inflation

Is the Federal Reserve Loosening or Tightening and What Will It Do Next?

Since September, Jerome Powell’s Federal Reserve System has been cutting rates as if a financial crisis were looming. Just as in 2006, Powell raised the federal funds rate to 5.25 percent in the summer of 2023 and left it there until September of the following year. This past September, he cut rates by 50 percent in September and by 25 more basis points at the following Fed meeting just as Fed Chairman Ben Bernanke did Starting in September 2007. We all know what happened next.

That’s where the similarity ends, however, when it comes to overall monetary policy. When Bernanke started his cuts in September 2007, he did so the way the Fed had always done so, with open market operations. The Fed began buying government securities from its member banks, thereby increasing the supply of dollars available to those banks, which forced the federal funds rate down. That’s not the way it’s done anymore.

After Bernanke embarked on what he euphemistically called, “quantitative easing,” which is basically doing the same open market operations on steroids, a new dynamic emerged. Since the member banks accumulated large deposits at the Federal Reserve, something they never had before, interest rate policy became separated from management of the money supply.

No longer did the Fed accomplish a lower fed funds rate by buying securities to supply member banks with more dollars. It now could simply lower the interest rate it paid on member bank deposits at the Fed to incentivize member banks to lend to each other at a lower rate. Doing so without actually increasing the base money supply will encourage commercial bank lending but does not have the exponential effect that both lower interest rates and more “base money” can have.

Commercial banks also create money when they lend on a fractional reserve, but it is limited compared to the money created by the Fed. If the Fed lowers interest rates, commercial banks are incentivized to make more loans, creating new money, but that money is “destroyed” once the loans are repaid. Thus, commercial bank monetary inflation reaches an equilibrium point, with occasional deflations, if the Fed doesn’t change the money supply.

The same money creation and destruction dynamic applies to the Fed itself but on a much larger scale. Money is also destroyed when loans held by the Fed are paid down, thus decreasing the base money supply. But the Fed has always been a net creator of money over the long term, which is why consumer prices have always increased over the long term.

That brings us to today, where the Fed seems to be unburdened by what has been, as Vice President Kamala Harris would say. That’s because unlike in autumn 2007, when the Fed’s balance sheet increased by necessity to achieve its first two rate cuts, its balance sheet has decreased since beginning cuts this past September. This is just continuing the monetary tightening the Fed began in 2022 when its balance sheet peaked at $8.9 trillion. Through August of 2024 it has reduced its balance sheet to $7.1 trillion and kept on reducing it right through its September and November rate cuts to $6.9 trillion, where it stood as of its November 21, 2024 release.

So, the Fed is lowering the federal funds rate while decreasing the money supply. So, is it loosening or tightening? One could make an argument either way and it gets even more complicated than that.

Read the rest at Tom’s Substack…

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?

Why is the Fed Tightening Credit But Not Money?

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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?

Why are people so averse to blaming government for its obvious failures?

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“These are the times that try men’s souls,” wrote Thomas Paine in late 1776, when the newly independent American states were at war with the mightiest empire in the world and not doing terribly well. Seven more years of hardship lay ahead, during which even John Adams’ family would struggle to keep body and soul together during the lean years of the Revolutionary War. Abigail Adams sold pins, handkerchiefs, and other trade goods sent home by her husband to feed the family while he was away making history.

246 years later, things aren’t nearly so bleak for Americans…yet. But they do suffer from the worst inflation in decades, growing shortages of food and other items, and an impending economic “hurricane,” if JP Morgan Chase CEO Jamie Dimon is correct.

The difference is this hardship is completely self-inflicted and unnecessary. Americans don’t suffer deprivation now to preserve newly declared independence and found a republic that will go on to inspire the world. They suffer from policies their own government imposed upon them, starting with Covid lockdowns, that have done no good whatsoever while causing immense harm.

With Washington, D.C., it’s always all pain and no gain.

In April, 2020, I asked, rhetorically, “When the Coronavirus Shutdown is over, will anyone blame their governments for the economic devastation they caused?”

Read the rest at Tom’s Patreon…

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?

The Government Declares War on Market Prices Just When We Need Them Most

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Price Gouging Summed Up Market prices are the foundation of civilization. They are the signal that tells producers how much of any one thing to produce. They tell consumers how much to consume or whether to consume a product at all. The reason retailers don’t normally throw away eighty percent of their stock is because market prices tell them how much to have on hand at any one time to meet current demand.

When they miscalculate and buy a little too much, they still don’t typically waste their stock. They put it on sale and meet the demand at a lower price.

To the extent the market is allowed to set prices, producers generally produce what consumers want to buy in the quantities they want to buy. When all supply is consumed and large amounts of consumers are not left with unmet demand, it is referred to as the market “clearing.”

The government is always and everywhere at war with market prices. Regulations creating barriers to entry limit supply, artificially inflating prices. Price controls, including “anti-price gouging” laws override market prices, creating shortages. Subsidies to producers (farm subsidies, for example), allow producers to limit supply, artificially inflating the price.

Federal Reserve monetary inflation juices up demand, both on the consumer side and the producer side, creating overconsumption, low savings rates, malinvestment and imprudent debt. This ongoing war on the market price of money, a.k.a. “the rate of interest” does all sorts of damage in the real economy. It directs companies to borrow money to expand production of products for which there is no real demand. That in turn sends workers into these zombie industries.

Even without an external problem like the coronavirus (and the much more harmful government response to the coronavirus), bubbles created by monetary inflation eventually pop. Then all the malinvestment is exposed, the imprudent debt defaults, and the workers employed in unprofitable ventures get laid off. This is the market telling everyone where the mistakes were made.

Right now, we have two economic crises at once. We have state governments literally ordering people to stop producing goods and services in an attempt to combat the spread of the virus. Whether that is the best course of action is a subject for a different time. That it is doing massive economic damage is indisputable.

That damage has caused a second crisis: it has popped the economic bubble blown up by the Federal Reserve over the past twelve years. The market is responding by trying to adjust prices to their market levels. It is lowering the artificially high prices of stocks. It will lower the artificially high price of real estate. The price of oil has fallen both because of the anticipated reduced demand and the increased supply from Russia and OPEC increasing their oil production.

But not all prices are falling. Given the surge in demand, the market is trying to raise the price of items like toilet paper, certain medical supplies and other essential items.

All these price adjustments by the market are essential for our well-being. They are the cure for the economic disease caused by the government response to the virus and the previous twelve years of monetary inflation and artificially low interest rates.

What is the government doing in response? It is escalating its usual, conventional war on market prices to a nuclear war. It is punishing suppliers of essential goods for raising prices. It is ramping up monetary inflation to historic levels to keep stock prices artificially high and unprofitable businesses alive to go on producing products for which there is no demand. At a time when market prices are more essential to our survival than ever, the government is doing more to override them than ever.

This is not an academic theory that only works on a graph in a classroom. This plays out before our very eyes in the form of essential goods not available to us at any price.

Why is there no toilet paper available? Ask most people and they will say it is because of “hoarders.” These are people who bought far more than they needed in anticipation of future shortages. The people who arrived at the store after the toilet paper is sold out vilify them. Others might just call them prudent.

The same people who vilify hoarders also vilify “price gougers.” They don’t seem to grasp the obvious cause/effect relationship here. If it weren’t for artificial limits on price, i.e., “anti-price gouging” laws, the price of toilet paper would rise dramatically with the surge in demand and the so-called hoarders would not be able to buy nearly as much. That would leave far more for everyone else. The toilet paper market would find the optimal price level where the greatest number of people could get what they need.

We may be able to laugh off the shortage of toilet paper, but when it comes to food, water, medical supplies and other important items, shortages are no laughing matter. Why are there not enough ventilators right now? Because government regulation raises the price of entry into the market and lengthens the lead time for new production. If not for these artificial barriers, hundreds of new ventilator producers would seize the opportunity to enter the market and sell ventilators.

Instead, the government is considering ordering companies who make related items to make ventilators instead. That will only result in less efficient production of ventilators and shortages in the products those manufacturers would otherwise produce.

This is only the tip of the iceberg in terms of the government overriding market prices. Every economic policy the government undertakes is at its root an attempt to do so. Every single one makes us poorer than we would be if the government did nothing.

The free market doesn’t produce perfect outcomes. It’s an imperfect world. But a free market produces the best possible outcomes in the real world of scarcity and occasional disasters. Prices are the lifeblood of the free market. They are what make it produce the best outcomes. Every time the government overrides market prices, it makes things worse – in most cases, unfortunately, to thunderous applause.

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.

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.

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…

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.