As recently as March 7th, Federal Reserve Chairman Jerome Powell testified to the Senate Banking Committee that interest rates could rise higher and faster than anticipated in an effort to fight inflation.
“Inflation is likely to take longer to return to our price stability goal than previously expected” Fed Chair Jerome H. Powell March 16, 2022
"The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal." Fed Chair Jerome H. Powell August 26, 2022
Taken at face value, Fed Chair Powell has clearly named inflation as the enemy. The plan is to raise interest rates as much and as quickly as necessary in order to bring inflation down; hopefully back down to the 2% inflation target of a few years ago.
Wasn't the goal to get inflation up to the 2% target just a few years ago? (see Fed's 2% Inflation Target Is Pointless)
U.S. DOLLAR, BRICS
Over the past century, the U.S dollar has lost ninety-nine percent of its original purchasing power. What that means is that one penny today represents all that is left from one dollar one hundred years ago. You have heard that old saying..."A dollar saved is a penny earned".
In recent years, the U.S. dollar has come under renewed condemnation. The sharp upward spike in prices after post-Covid opening of the economy sparked fears of hyperinflation and generated considerable "anti-dollar" conversation and action.
There are calls for removing the U.S. dollar's reserve status, abandoning the dollar for international trades, etc. A lot of the noise emanates from and around a group of countries with emerging economies - Brazil, Russia, India, China, and South Africa; hence, the acronym BRICS.
Various alternatives to the U.S. dollar have been advanced, theorized, and postulated. Just the other day, Jim O'Neill, former Goldman Sachs Group Inc. chief economist said the BRICS nations "should expand and work to counter the dollar's dominance".
Does anyone seriously think the countries listed above are in any way capable of offering a viable alternative to the U.S. dollar? Is there a political threat to the U.S. dollar? Yes; absolutely. The countries above, though, have nothing to replace the U.S. dollar, even if it is past its prime.
A CHANGE IN DIRECTION?
If the Fed changes its current tack regarding interest rates so soon after telling the press (and Congress) that "interest rates could rise higher and faster than anticipated in an effort to fight inflation", the response of the markets could be catastrophic. It has happened before. It might help to look back at some previous occasions involving the Federal Reserve and interest rates. Perhaps there are some clues that will help in assessing the current situation.
ROARING TWENTIES AND THE GREAT DEPRESSION
During the 1920s, the Fed emphasis was on lower interest rates. Open market purchases in 1924 and 1927 provided plenty of cheap fuel for stock market investors and speculators. Liberal lending standards allowed margin loans of as much as ninety percent to ordinary retail stock investors. Speculation was rampant.
Beginning sometime in 1928, the Fed changed switched their emphasis to higher interest rates. The economy began to weaken and was slowing appreciably before the stock market crash in October 1929. A decade of economic depression followed.
Regarding the Fed's role in the Great Depression, Ben Bernanke, had this to say...
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."...Remarks by Governor Ben S. Bernanke (At the Conference to Honor Milton Friedman, University of Chicago -Chicago, Illinois November 8, 2002)
THE GREAT RECESSION
Shortly before the turn of this century, fears about Y2k spurred the Fed to inject huge amounts of money into the economy. When the dot.com bubble burst the Fed began to pursue lower interest rates aggressively. A booming real estate market and a fast recovery for stocks from their previous washout seemed almost out of control on the upside.
The Fed began to raise rates again in 2007, while the United States and the rest of the world were awash in cheap and easy credit. The quality of mortgages, student loans, and auto loans was questioned and some very big players in the financial markets (investment banks, insurance conglomerates, super-sized brokerage firms, etc.) found themselves literally bankrupt.
As a result, the Fed changed direction again; back to lower rates with a vengeance. In addition, the Fed actively entered the open market and made unusually large purchases of U.S. Treasury bonds, agency bonds, and mortgage-backed securities.
Fed chairman at the time of the implosion was the aforementioned Ben Bernanke. The seeds of destruction, however, were sown during the previous Chairman's final years at the helm. When testifying before Congress after the credit implosion of 2007-08 and after he had been replaced by Mr. Bernanke, Alan Greenspan had this to say...
"I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well."
STATEMENTS OF REASSURANCE
As an official representative of the Federal Reserve, Ben Bernanke, in his apology cited above, offered the assurance that "we won't do it again" in reference to the Fed's responsibility for causing the Great Depression. Unfortunately, that did not stop the credit implosion of 2007-08 and the resulting Great Recession.
That embarrassing turn of events did not stop Mr. Bernanke's successor from making similar statements of comfort and assurance. Janet Yellen had this to say near the end of her term as Fed Chair...
"another financial crisis is unlikely in our lifetime because of the measures the Fed has taken” .Janet Yellen 2017
Someone or something must have had other ideas. Since her proclamation of assurance we have experienced: 1) forced shutdown of the economy, 2) higher rates of inflation, 3) renewed weakness and threats to the U.S. dollar, 4) falling stock and bond markets, 5) bank failures, and 6) threat of system-wide implosion of the financial markets.
HEIGHTENED FEAR AND ANXIETY
After watching over the years and decades as the Fed changes course continually, investors and others are getting restless. Originally, the Fed promised it would manage things in such a way as to eliminate recessions or considerably reduce their impact.
That hasn't happened. If anything, financial problems are more frequent and more volatile in nature; and the economic dislocation is more severe and longer-lasting.
No matter who is in charge, and regardless how much money is spent to improve the situation, the Fed still has a losing record.
Expect strategy and course of action to change again. Any 'new' emphasis, though, will be mostly a recycling of previously failed strategies and will be highly reactionary.
Investors should remain very cautious. (also see Chairman Powell - Give Me Just A Little More Time)
Kelsey Williams
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!