Tag Archives: interest rates

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?

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.

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?

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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.