To reduce or not to reduce? Federal Reserve Chair Jerome Powell has advised financial markets that a decrease in interest rates may not occur in December. However, certain individuals on the Fed’s Board of Governors, including Stephen Miran, who was appointed and is a supporter of President Donald Trump, advocate for reduced rates. The direction the Fed will choose remains uncertain.
TL;DR
- Federal Reserve Chair Jerome Powell signaled interest rates may not decrease in December, despite some Fed members advocating for cuts.
- The Fed's mandate includes full employment and price stability, but its interest rate targets are not absolute determinants of market rates.
- Interest rates reflect the cost of time and capital, influenced by market supply and demand, not solely by Fed policy.
- The article criticizes the Fed's perceived ability to steer markets, suggesting a rigid guideline focused on price stability is needed.
Markets want predictable interest rates. However, that isn’t the Fed’s job. Officially, the Fed has a three-part mandate: full employment, price stability, and moderate interest rates. An unspoken agreement between politicians and central bankers has made this a de facto dual mandate focusing on labor markets and price levels. Managing the money supply addresses both concerns.
We must alter our perspective on monetary policy, otherwise, we risk being consistently misled. Modifying interest rate objectives serves as a method to achieve a goal. The interest rate doesn't represent the cost of money, but instead, the cost of time. When you obtain a loan, you are essentially leasing funds. Interest rates indicate the worth we assign to possessing capital presently, rather than in the future.
Interest rates ought to shift according to the ebb and flow of investment market supply and demand. Should economic underpinnings alter, such as a tightening labor market, borrowing costs should decrease. A lack of fluctuation can prove detrimental if it hinders adaptability.
The Fed doesn’t set interest rates. As powerful as America’s central bank is, it’s still just one player in a globe-spanning ocean of financial markets. Instead, the Fed sets targets for short-term interest rates. Those target rates indicate the Fed’s general monetary policy stance, but they are not the substance of monetary policy. The Fed no more “determines” interest rates than a meteorologist determines the weather.
Financial markets typically view declining interest rates as an indication of more accommodating monetary stances. However, as scholars have noted for a considerable time, these rates might equally signify a more restrictive monetary approach. When the Federal Reserve fails to satisfy the market's requirements for funds, the economy experiences a contraction. This leads to a decrease in the demand for capital. Consequently, the cost of capital, which is represented by interest rates, also declines.
Refrain from assuming easy funds are available due to low interest rates. This misjudgment proved costly following the 2007-08 financial crisis, also known as the Great Recession; rates plummeted close to zero not from an abundance of money, but from its scarcity.
When the Federal Reserve declares an interest rate objective, it's projecting a near-term cost of funds that it believes aligns with peak job creation and a steady currency. Whether that forecast proves accurate hinges on the precision of the Fed's intricate economic simulations in reflecting actual conditions. At times, these models succeed. However, when underlying circumstances shift, they frequently fall short. Consequently, making a firm commitment to a particular cost of capital is an unwise pursuit. The Fed doesn't dictate the flow of investment capital; rather, it manages the availability of money.
Regrettably, the Federal Reserve sometimes overlooks this principle. This led to inflation reaching a four-decade peak after the COVID-19 pandemic. The Fed's attempt to stabilize financial markets involved generating trillions of dollars in new currency to acquire securities. In a way, this strategy was successful, as financial markets avoided a collapse. However, this came at a price. The infusion of substantial new funds during a period of reduced output and disrupted supply chains quickly escalated costs. The Fed failed to address the fundamental driver of inflation: an excess of currency pursuing a limited supply of products. Consequently, for several years, families experienced a faster increase in their living expenses than in their earnings.
Federal Reserve officials seem to enjoy the aura of being perceived as economic experts. By manipulating certain controls, altering market dynamics just so, and making adjustments, they can guide interest rates to levels that suit the economy's requirements.
However, this is absurd. The Federal Reserve lacks anywhere near the capacity to steer markets. Rather, it stumbles forward, feeling its way through the profound obscurity of financial market chaos—much like everyone else. We ought to grant it considerably less respect than we currently do.
Honestly, there's no justification for Entrusting Fed policy to the judgment of its senior officials. The economy would function more effectively with a rigid guideline for monetary policy, directing the Fed's attention to price stability. Congress possesses the ability to establish such a guideline by approving legislation to modify the Fed's directive. Considering the frequent missteps by The Fed—the periods of 2007-08 and 2020-21 were both significant errors—it's surprising that lawmakers haven't taken action.
Debating the precise interest rate trajectory “should be” when such foresight is impossible is unproductive. This practice shrouds the Federal Reserve with an aura of importance that hinders public oversight.
Considering the money supply, and subsequently, inflation. The dollar's decline has not yet returned to its pace before the pandemic. Lasting economic prosperity can only be achieved by removing the pretense of Federal Reserve authority.
Coins2Day.com's commentary pieces present exclusively the perspectives of their contributors, not necessarily the viewpoints and convictions of Coins2Day .
