For the better part of the past four years, we’ve had to listen to the chattering classes defending the sanctity of the independence of the Federal Reserve. President Trump was routinely lambasted for constantly criticizing Jerome Powell, while several of his other nominees to the Fed, such as Herman Cain and Steven Moore, were deemed to be too cozy to Trump to warrant consideration. Both of them withdrew their nominations for other reasons, but it appeared that their nominations were DOA. For the same reason, the confirmation of the “controversial” Judy Shelton looks like it is going to die on the vine because she’s been portrayed as Trump’s lackey.
Yet now we have the prospect of Janet Yellen, the former chair of the Fed, being nominated as Joe Biden’s Secretary of the Treasury. If nothing else, that will basically put the nail in the coffin of the notion of Fed independence. Does anyone seriously doubt that the Treasury and the Fed will be joined at the hip when the two most recent Fed chairs head those two agencies?
Yet that prospect probably won’t be an impediment to her being confirmed by the Senate—on the contrary. The markets greeted Yellen’s nomination with absolute euphoria, as well they should. The prospect of the Treasury and the Fed working more closely together in a time of crisis is certainly a reason for optimism. And it’s certainly good for my portfolio, so I’m not complaining. But lost in all of the jubilation is that the idea of Fed independence has gone by the wayside, and nobody seems to give a hoot.
This is certainly not a bad thing. The whole idea of Fed independence was always suspect. The Fed is no more independent than the FBI or the Energy Department. It’s just another branch of the government that arguably should always work in tandem with the Treasury for the betterment of the U.S. economy and usually does. Yet someone created this fiction that the Fed is somehow the moral equivalent of the Supreme Court and above politics.
As we’ve seen clearly over the past month or so, the Fed chair himself doesn’t believe in or respect Fed independence; otherwise, he wouldn’t be appearing before Congress or making public speeches lobbying for more fiscal stimulus, something outside his purview. When was the last time you heard a member of the Supreme Court telling Congress that they should pass this law or abolish that one? While the public generally knows where members of the Supreme Court stand on the political spectrum—that’s why they were nominated in the first place, after all—they generally keep silent once they’re seated, as they should. I don’t mean to suggest that Fed members do the same—they really can’t, since they make public policy—but they should at least try to stay out of political debates. But since Powell and most of his colleagues are on the side of the angels, nobody seems to care.
The Fed is a vital—arguably the most vital—arm of the federal government when it comes to economic and financial matters, more so than the Treasury itself. So the whole idea of the Fed being independent is ludicrous. And the prospect of a Yellen-led Treasury linking arms with her old institution isn’t something to be worried about but something to be embraced, as the financial markets obviously have already done.
Yet, it’s not clear what the long-term implications are for the U.S. economy, inflation, and asset prices of such an arrangement. The Fed has adopted Modern Monetary Theory as its guiding principle for the past dozen years, more so just in the past nine months, and will likely continue to do so going forward. To refresh your memory, MMT, at least in practice, means the federal government can spend as much as it likes regardless of budget deficits, with the Fed picking up the tab, basically buying up all of the excess debt the markets can’t absorb. Actually, it goes beyond that, buying up as many assets as it wishes to put its monetary policies into action, often crowding out private investors. As we know, by driving interest rates down to zero, the Fed has made long-term government bonds an unattractive investment for millions of investors and may eventually do the same in the high-grade corporate bond market before too long.
Of course, that has had the opposite effect by making equities practically a no-lose situation. Even though it’s not buying any stocks—at least not yet—the Fed props up stock prices indirectly by pushing people out of the bond market and into equities whether they want to or not. That policy is likely to continue for the foreseeable future. But at some point, the sages tell us that everything that goes up must come down, although nobody knows when that point is reached. Until then, enjoy the ride.
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INO.com Contributor – Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.