We are moving deeper into the silly season. If there are still any primaries going on, Super Tuesday just about sucked what little oxygen there was out of the room. That President Joe Biden and former president Donald Trump would end up being the presumptive nominees for their parties was, based on the polling, expected.
I say presumptive since the general electorate is in no mood for a repeat of the 2020 presidential election. American democracy, however, is party driven not majority driven, so the fringe elements of the private clubs called the Democratic and Republican parties will serve up their preferred menu to voters.
I do not discern a scenario short of death via natural causes or a jail sentence administered before January 20, 2025 where the candidates’ respective parties can pull some convention shenanigans that denies either man their party’s nomination.
As with elections going back to at least 1992, this election will boil down to which candidate is perceived as being able to relieve the pain of rising consumer and producer price levels. A better economy will be on or near the top of most of the electorate’s early holiday shopping list. It would be easier for the incumbent president to keep his fanny in the Oval Office big chair if price levels including mortgage rates could fall significantly so that happy consumers become happy voters for the Man from Scranton.
According to this well-written piece in Reuters, the Trump campaign camp is concerned that the Federal Reserve will use its expected three fed funds rate cuts to provide Mr Biden with a better economy to campaign on. Why vote for the Man from Queens when there is a chance that he may exchange his residence at Mar a Lago for a correctional facility in Fulton County, Georgia.
The theory is that a reduction in the overnight rate at which banks lend each other their excess reserves will influence a reduction in lending rates throughout the rest of the banking system thus putting more credit into the hands of consumers and producers leading to more transactional activity. That is the theory.
Jerome Powell, chairman of the Board of Governors of the Federal Reserve System and the Federal Open Market Committee, says to broken record ad nauseum that the Board of Governors is not political when asked to opine on fiscal matters and I suspect he would say the same if accused of politicizing rate setting.
I would push back a little on Mr Powell’s argument that the Fed is not political. While it may not be partisan (Mr Powell was nominated by a Republican and confirmed by a Republican Senate and re-nominated by a Democrat while confirmed by a Democratic Senate), the Federal Reserve is political. As an agency created by the Congress and subject to congressional oversight, the Fed is subject to political pressures, whether it is jawboning for lower rates from Donald Trump to vicious criticism from U.S. Senator Elizabeth Warren, Democrat of Massachusetts, about Mr Powell’s prioritizing banks over consumers.
In part due to the heat he catches from Democrats and Republicans on monetary policy, Mr Powell should give a little push back himself when asked about the fiscal policies emanating from the Executive and Legislative branches. The Federal Reserve is one of the U.S. government’s primary underwriters, having to put U.S. sovereign debt unto the Federal Reserve’s balance sheet when injecting cash into the banking system.
If the Fed is going to be placed into the position of lynchpin in a monetary Ponzi scheme, the Fed chairman should give himself some license by telling the Treasury and the Congress that their fiscal policies are inflationary or may slow down U.S. economic growth much less put taxpayers on the hook for debt we cannot repay.
I think one approach the Fed should attempt if it is so concerned about flying low under the political radar is to advocate an amendment to the Federal Reserve Act that eliminates the mandate of maximum employment, stable prices, and moderate long-term interest rates. Promising the electorate jobs, good wages, no increases in food and energy prices, and low mortgage rates is fodder for politicians. This triple mandate puts the Fed in the politically precarious position where it is responsible for delivering on these political “chicken in every pot” promises.
One takeaway from the Reuters article is that a rate decrease could shape positive attitudes about an expected fall in inflation. While the Fed’s intent nor mission is about meeting electorate expectations about the performance of the economy, a resulting boost in good feelings resulting from a fall in interest rates could sway more votes to the incumbent reining over an improved economy. Such a result would make the Fed look political no matter how many times Jerome Powell denies those optics at a post-FOMC press conference.
But suppose the Federal Reserve were to focus on a simpler mission: backstopping the banking system. As a lender of last resort to banks, the Fed could focus on the much-maligned discount window where banks bring good collateral in exchange for loans at short term interest rates. In addition, the Fed should stop trying to determine an effective target rate for interbank overnight lending. As the target rate setting in this market bleeds into other markets, the Fed could insulate itself from political pressure by getting out of this market altogether and allow commercial banks to set this rate without Fed influence.
The downside for State actors is that taking the Fed out of the overnight market may create a level of uncertainty about maintaining what I call a transceiver function that the State relies on for creating and directing the volume of transactions that it may tax. There is the risk that yield creation could be negatively impacted. But uncertainty is a two-sided coin. We could just as well see an increase in banking activity with the Fed stepping aside from its oversight of the overnight markets.
If the Board of Governors of the Federal Reserve System wants to be viewed as politically independent, it will have to untether from the activities and goals that tie it to politics and the electorate.
Alton Drew
25 March 2024
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Alton Drew 