How to Reform the Fed

A Modest Proposal [The Daily Reckoning] November 03, 2023 [WEBSITE]( | [UNSUBSCRIBE]( How to Reform the Fed Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, Is a common refrain in certain economic circles: “We need to reform the Federal Reserve.” We are told this should be done or that should be done. This will make it more efficient, that will make it more transparent. And perhaps even it would. Yet we take a dim view of most “reform.” The reason is simple as Sam and clear as gin. Reform is an ax that rarely strikes the root. That is often by design. It is designed to deliver a glancing blow — to leave the root largely unhacked. That is because too many interested parties draw sap from the root. It is the very source of their prosperity. Authentic reform would shatter the root — and the sustenance it offers a selected few. H.L. Mencken labeled reform “mainly a conspiracy of prehensile charlatans to mulct the American taxpayer.” We believe he was correct. The late libertarian Frank Chodorov said most reform aspires to “clean up the whorehouse”... while “keeping the business intact.” For a more fitting analogy we seek in vain. We file only this one caveat: The whorehouse — for all its sin — at least does an honest trade. A fellow emerges from this den of carnality somewhat lighter in the wallet, it is true. Yet he also emerges somewhat lighter in spirits. He has gotten value for money. Can the same be said for the Federal Reserve? Its very business is false. It manipulates interest rates that send false signals to markets. It inflates bubble after bubble. What is a bubble but a monstrous falsehood? Yet even most “reformers” — there are exceptions — accept the Federal Reserve’s central role. That is the distortion and manipulation of interest rates. To these reformers it is a fact as elemental as gravity … or the ebbing and flowing of the tides… or the imbecility of a congressman of the United States. Eliminating that role is the one reform they will not consider. Is it true reform you seek? In the spirit of benevolence so characteristic of us… here we propose our own modest reform: The Federal Reserve ceases all manipulation of interest rates and influence upon the same. That is, that the Federal Reserve ceases distorting the price of credit. That is, that the Federal Reserve ceases distorting the price of time itself. You say our reform is less reform than abolition — that our implement of reform is a wrecking ball rather than a chisel. Perhaps you are correct. Very few would agree to it. Let us then propose a reform far more modest: - Restore the Federal Reserve’s original purpose of providing liquidity to otherwise solvent banks in event of financial crisis. - Strike from its statute the twin mandates of “price stability” and “full employment.” There you have a reasonable reform… at least by our liver and lights. The Federal Reserve would work far less mischief if implemented. Yet if it is ultimate reform you seek, this we suggest in seven short words: “The Federal Reserve Act is hereby repealed.” That is, reform the entire business off the Earth. This — incidentally — is within the lawful power of the Congress of the United States. No more setting, influencing or in any way bullying short-term interest rates, long-term interest rates, intermediate interest rates or any other interest rates. Let the market find its own level — high, low, all platforms in between. Turn the credit business over to borrowers and lenders on the free market… as the prices of automobiles, computers, chewing gum, floor mops and catcher’s mitts are turned over to the free market. Let the devil take the hindmost. Will there be losers? Of course there will be losers — but does not the current arrangement yield its losers? There will also be winners. And likely among them will be many of today’s losers who the present arrangement disfavors. Most importantly, it would wring the wild excesses from the financial system. The booms would not thunder nearly as loudly — or for nearly as long. Yet nor would the busts. Thus you have our simple proposal of reform. We offer it today in the highest spirit of public service. It will be enacted the instant Hell is an ice sheet… Below, Jim Rickards breaks down the Fed’s latest (non)-move for you. Jim says the Fed is “afraid of commitment.” What does he mean? Read on. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: [This could be the single best way to help protect your wealth from what Jim Rickards calls “Biden Bucks”…]( That’s the administration’s hush-hush plan to create a government-controlled digital dollar. 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[Click here for more...]( [Watch It Here]( The Daily Reckoning Presents: Powell is afraid to commit… ****************************** The Fed Has a Commitment Problem By Jim Rickards [Jim Rickards] JIM RICKARDS This past Tuesday, I offered the following forecast of what would happen at the FOMC meeting this week: On Wednesday, the Fed will leave its target rate for fed funds unchanged. That decision will keep the federal funds target at 5.50% as set at the July 26, 2023, meeting. Over the course of [13] FOMC meetings beginning March 16, 2022, I’ve been correct in all of my forecasts including the “skipped” rate hikes at the June and September 2023 meetings. I’m confident I’ll be correct on Wednesday also. The Fed did keep the fed funds rate unchanged as I had projected. At the same time, they warned that rate hikes are still on the table, and they could raise rates again. But they did not offer a date when that might be expected. That makes 14 Fed meetings in a row going back to March 16, 2022, when I got the Fed forecast right. I don’t say that to brag, it’s just that I know how to interpret what they say beforehand. You just have to know what to look for. My advice that the Fed would leave further rate hikes on the table was also correct, but the Fed hinted strongly that any further rate hike would not happen until 2024. Events remain uncertain from here, but it’s so far, so good for my forecasting. Here’s the text of part of the Fed’s Wednesday press release. The committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the committee decided to maintain the target range for the federal funds rate at 5.25–5.50%. The committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The committee is strongly committed to returning inflation to its 2% objective. The FOMC vote in favor of this policy statement was unanimous. This meeting did not include the notorious “dots,” technically the Summary of Economic Projections (SEP) offered by the 19 Fed governors and regional reserve bank presidents and presented in graphical form as a dot plot. What Comes Next? It’s important to look at the Fed’s reasoning behind its moves and to consider what’s next both for the Fed and the U.S. economy. Fed Chair Jay Powell’s press conference following the announcement is always more informative than the official announcement and this meeting was no exception. Powell’s insistence on flexibility going forward is obvious. But Powell and the Fed are caught in a dilemma. Inflation remains too high, and Powell acknowledged this. The CPI (annualized) was 3.0% in June, 3.2% in July, 3.7% in August and 3.7% again in September. That’s a steady increase driven mainly (if not exclusively) by higher energy prices. The Fed’s hard-won gains against inflation are being lost. At the same time, Powell seemed relaxed about the CPI figures. He referred to other inflation indexes that showed inflation was still coming down. He also said that we might be at the “terminal rate” where inflation comes down further without more rate increases. [Urgent Notice From Paradigm CIO Zach Scheidt!]( [Click here for more...]( Hi, Zach Scheidt here… I’m the Chief Income Officer at Paradigm Press. With inflation raging (and showing no signs of coming to an end any time soon), almost everyone in America is feeling the pain in a big way. Which is why, several months ago, I set out on a big mission… my goal was to create a complete, step-by-step plan to surviving and beating inflation… one that anyone could take advantage of. Today, after hundreds of hours of research, I’m revealing all of my findings. [Click Here To See What I Found]( Finally, Powell said, “Progress will come in lumps and be very bumpy,” and “We feel like we’re on a path” to reduced inflation. In short, Powell was not troubled by the 3.7% CPI number, he was encouraged by other indexes and he suggested inflation might come down on its own from here. Of course, Powell did not say the fight against inflation is over. He said, “We haven’t made a decision about December [the Fed’s next meeting]. The idea that it would be difficult to raise again after stopping for a meeting or two is just not right.” He also said, “We will need to see slower economic growth and some weakening in the labor market before we see a return to price stability.” And “We need to see shortages and bottlenecks go away… We’ll still be left with some ground to cover to get to price stability.” He summarized by saying that if the Fed sees conditions where they need to tighten, “we will tighten.” On the one hand, Powell was relaxed about current inflation numbers and suggested inflation might come down on its own from here. On the other hand, he left the door open to future rate increases if needed to win a final victory over inflation. Powell was having it both ways. Take your pick. There was some discussion about the “term premium” issue that got a lot of coverage the past week. Term premium is the difference between the nominal rate on longer maturity Treasury securities and the rate of inflation. For example, if the 10-year Treasury note yields 5% and inflation is 3.7%, then the term premium is 1.3%. The Fed’s theory is that term premium is the “extra” interest that the market wants to compensate for risks other than inflation. It’s a completely made-up theory with no empirical support. But the Fed believes it. Term premium entered the debate recently because the current term premium (about 1.3%) is high by historical standards. That might act as a brake on inflation by itself (through higher mortgage rates) without more rate hikes by the Fed. Powell poured cold water on the term premium debate without actually denying that the Fed looked at it. He said the Fed needed to consider if tighter monetary conditions were coming from term premium or perhaps other factors such as the strong dollar. The Fed is not sure if a high term premium would be persistent or if other tightening factors such as a strong dollar would be persistent. This is the Fed’s convoluted way of saying that term premium and the strong dollar might be inflation-fighting factors. But the Fed is not sure, and they won’t rely on that in setting policy. As they say in New York: “Go figure.” The only areas where Powell was definitive were: The FOMC is not thinking about cutting rates. And the Fed does not have a recession in its forecast. Neither of those statements means very much. The Fed is always behind the curve. They will cut rates when they have to, whether they are thinking about it today or not. And the Fed never has a recession in its forecast. But they do happen. On the whole, it was one of the blandest, non-committal Fed meetings in memory. Not much news really. That doesn’t mean important events are not unfolding. It just means the Fed is not attentive to them. The next Fed meeting is Dec. 13. As of now, the best forecast is that the Fed will not raise rates at that time. But given a world in turmoil and the Fed’s nonchalant posture, the truth is anything can happen. Stay nimble. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Ed. note: [This could be the single best way to help protect your wealth from what Jim Rickards calls “Biden Bucks”…]( That’s the administration’s hush-hush plan to create a government-controlled digital dollar. And even though Jim’s been warning about this for months now, he still argues that [this new digital dollar could be the single greatest threat to your freedom that we’ve ever seen…]( But the situation isn’t hopeless. [Here’s what you can do to fight back.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Brian Maher] [Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. --------------------------------------------------------------- [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. 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