Fed Mandates

Our  Federal Reserve Chairman Powell testified today at Congress ... and, as often is the case, the mandate of the Fed was mouthed again ... as it often is. It was not questioned. It was just mouthed. I find it interesting that no Congressperson questioned this mandate.

The Fed’s mandate, as previously set by Congress is just two fold: Full Employment (now specified as a 4% unemployment rate) ... and Low Inflation (now specified as a 2% inflation rate). And, interestingly, both these objectives are now being surpassed ... by quite a bit. Inflation is now running at 1.6% and our unemployment rate is at 3.7%. Wow! The Fed has surpassed both their mandates!

Had I been questioning Powell today, I would have asked him if it is not time for Congress to rethink these mandates and, possibly, update or add to them. I have broached this topic before and have some suggestions for some updates for the Fed’s mandates:

- Economic Growth — certainly the Fed assumed this temporary mandate during Obama’s administration with its Quantitative Easing strategy — the huge expansion of its balance sheet by almost four trillion dollars. Basically, this meant the Fed bought huge amounts of government  and mortgage debt ... pumping lots of money into the economy to drive up the prices of assets ... like stocks, bonds and housing ... and thus hold the economy’s head above water.

- Fair Trade — President Trump is in the midst of a trade war with China and other countries to bring down serious balance of payments problems. And trade wars often involve the price of the dollar at those countries with whom we are negotiating new trading policies. A strong dollar can easily negate the impact of any corrective tariffs imposed upon trading foes.

- Monetary Flows — There are such large disparities now between interest rates in the US and elsewhere (as much as 3 percentage points) that this disparity creates huge carry trade imbalances. Yes, right now this may help America finance our deficits ... but this might not always be the case. (Could this same flow be accomplished with a smaller differential?) Therefore, it would seem to this observer that our Fed should keep a wary eye on the difference between world-wide interest rates in setting our own rate ... in order to manage international money flows.

Therefore, rather than just the current mandates, I would suggest adding at least the above three objectives to the Fed's portfolio ... particularly during times when its existing two are being easily met ... like now.

A Few Observations

- Obama's spooks, Brennam, Comey and Clapper, were so focused on undermining Trump's bid for the White House; I wonder how many real intelligence jobs went undone or underdone?

- Back in the day when salt was as valuable as gold, a bag of potato chips might have cost as much as $100

- If the Clinton Foundation and Global Initiative were not money laundering operations, how come they have gone quiescent after Hillary is no longer a shoe-in for the presidency.

- How does the DOJ's Rod Rosenstein still have a job since it has been revealed that he illegally back-dated by weeks the authorization to break down Manafort's  door at 3 AM to search his home and arrest him?

- Why is Turkey still in MATO?

- When the Federal Reserve Bank's primary missions of full employment and a 2% inflation rate are met, as they are now, it would seem that the Fed could swing to helping our balance of payments strategies and lowering the cost of financing our national debt.

Sugar High

Mitt Romney recently spoke to the Federal Reserve Chairman, Ben Bernanke, to ask him not to initiate the Fed's latest round of quantitative easing (QE3).  This request fell on deaf ears ... for the Fed is now pumping $40 billion a month into the U.S. housing market by printing money to buy mortgages ,,, and, unlike previous quantitative easings, there is no indication of when it will stop its monitary printing presses.  This, of course has inflated the stock market and deflated the dollar.

America is experiencing another financial "sugar high" ... with no Michael Bloomberg or Michelle Obama to nanny-state us down.  The Fed has now expanded its normal mandate to effect "full-employment" ... the diametric opposite of its primary mandate of "controlling inflation." (This is because our current administration has no clue on how our economy can otherwise reduce unemployment rates.)  Everyone who has a brain knows that this fire-hose monetary expansion (QE3) combined with the Fed's previous QE1 and QE2, will be inflationary ... eventually  The question is, "When?" 

Perhaps I can propose an answer to this query?  Bernanke and Co. have calmed some investor worries by claiming that they have "a plan" to [eventually] deleverage the Fed's balance sheet.  I will here and now guess what this plan might be -- at some point the Fed will open the flood gates and allow inflation to come charging back.  If the Fed has been, by then, able to substantially extend the maturities of the debt it now holds (which it has been doing with a vengeance under "Operation Twist"), then the price of this government debt will plummet and the Fed can either write it down on its balance sheet or buy it back with dimes on the dollar.  Of course, the fact that other investors of this debt (pension funds and many IRA retirement funds of our seniors ... among others) will be financially hosed seems not to be a concern of the Fed ... as it has bigger fish to fry (getting Obama re-elected).

The reasons that the United States is not experiencing run-away inflation at the moment are three-fold:
- First, the Fed is keeping interest rates artificially low (short term rates are essentially zero) with its open-market operations,
- Secondly, because of our rotten economy and high unemployment, there is virtually no wage inflation (Chicago teachers being a visible exception),
- And lastly, because one of the major drivers of inflation is housing costs (home selling prices are converted to equivalent rental rates), this area has been profoundly deflationary ... offsetting raging inflation in medical and education costs. (One can also argue that food and fuel prices have been obviously inflationary, but, since they are excluded from core inflation calculations, they don't have the impact that they otherwise might.)

Now, let me extend this Fed analysis ... the fact that QE3 is specifically directed toward the housing market through packaged mortgages purchasing leads me to suspect that the Fed's plan to deleverage its balance sheet may, in fact, already be underway.  What the Fed is doing is bound to reduce the cost of mortgages ... therefore increasing the cost of homes.  And, if that one deflationary drag (housing) is eliminated with QE3, might not that usher in real robust inflation?  So instead of suffering from diabetes from all this sugar, the U.S. economy will return to a hypoglycemic state (read out-of-control inflation).

Q.E.D.