The Federal Reserve raised its benchmark interest rate by a quarter-point Wednesday, the third such increase in six months and a message of confidence in the strengthening of the U.S. economy.
The increase, which brought the Fed funds rate to between 1 percent and 1.25 percent, was highly anticipated by the markets. On Wednesday morning before the rate increase, Fed futures pointed to a 93.5 percent chance of a rate hike.
The rate hike “reflects the progress the economy has made and is expected to make toward maximum employment and price stability,” Fed Chair Janet Yellen said Wednesday in a press conference.
The following is a piece I wrote more than two years ago, but in light of the story above I think it bears repeating:
September 21, 2015:
There is a mysterious entity that controls economic activity in the U.S., controlling our economy and financial stability, even though its members are un-elected and not responsible to anyone in government but themselves. It is mysterious because its meetings are held in secret and its purposes unclear.
Last week there was a major news story, as CNN reported it: No liftoff: Federal Reserve leaves rates near 0% . Concerns about a global economic slowdown, low inflation in the U.S. and volatile stock markets lowered the chances of a September rate hike.
“The situation abroad bears close watching,” Fed chair Janet Yellen said at a press conference Thursday. “Heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets.”
This was followed the next day by another story : US stocks follow global markets slide in wake of Fed’s interest rate decision: The Fed’s decision to leave US borrowing costs at 0-0.25% was in part a response to a market meltdown in August, but it received a cool reception from investors unsettled by the delay in tightening policy.Markets fell across most of the world, starting with a 2% fall in Tokyo’s Nikkei index; the Dax in Germany lost 3%, France’s CAC index closed down 2.5%, and the FTSE 100 lost 1.3%.
Expectations of an interest rate increase from the Fed this week had diminished following the China-induced turmoil in markets in August, but investors had been braced for a signal from Washington that a move was likely soon. Instead, the Fed’s chair, Janet Yellen, combined unchanged policy with a soft statement on Thursday that highlighted anxiety about the global economy.”
Now I don’t know about you but I wold love to borrow money at a 0 to 0.25 rate. I can’t, you can’t, but apparently some major investment banks, who supply a pipeline of members to the Federal Reserve Board (FSB) Board officers are able to just that and then soak the public with interest rates that run up to, believe, or not 50%, at payday loan companies. What is going on here and why don’t more of us see it for the “con-game” it is.
“It was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907. Over time, the roles and responsibilities of the Federal Reserve System have expanded, and its structure has evolved. Events such as the Great Depression in the 1930s were major factors leading to changes in the system.
The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve’s dual mandate. Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include conducting the nation’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and releases numerous publications, such as the Beige Book.”
Historically, in my lifetime, the Fed has acted as the agent for Wall Street, the Banking Industry and major corporate interests. The people that comprise the Fed’s Board of Governors and its Federal Open Market Committee represent a revolving door between the Fed, Wall Street and major banking institutions. While the President, with the advice and consent of Congress, appoints the Fed Chairperson, the reality is that person is independent of governmental control:
“According to the Board of Governors, the Federal Reserve System “is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”
So in reality the United States economy, is to a large degree controlled by an independent entity, that is closely intertwined with the U.S. centers of private capital. Does that seem somewhat inconsistent with the idea of a democratic country? Considering the effect economic meltdowns cause the people of this country, is it really sound to have the prime agents of recovery most concerned about protecting the financial institutions that caused the meltdown? Acknowledging my lack of expertise in the supposed science of Economics this is what I’d like to explore.
I mentioned in my lifetime that the Fed has acted as an agent for Wall Street, the Banking Industry and major corporate interests, let me explain my perspective. Most of the pronouncements I’ve ever heard coming out from the Fed have been regarding controlling inflation. Now in truth, while runaway inflation in a country’s economy can be devastating (see Germany before the rise of Hitler} a moderate rise in inflation actually helps the majority of workers, while at the same time devaluing the holdings of the wealthy. Now as the years of my life went on through the 50′s, 60′s, 70′s, etc., every so often I would hear cryptic pronouncements from the Fed that went like “The Federal Reserve has raised interest rates to slow down the economy, due to the negative effect of low unemployment threatening to raise the rate of inflation.” This was always puzzling to me because one of the supposed goals of our government, endorsed by both political parties, was to lower the rate of unemployment to almost zero. Yet each time we would see our Unemployment Rate fall below 5%, we would see the Fed raise interests rates, to “slow down” the growth of the economy. This is interesting because one to the original Congressional mandates setting up the Fed was as written above “Maximum employment“. Now of course in tandem with that was “stable prices“, so what can we surmise by those “Twin Mandates” in interpreting the Feds actions to “slow down” the economy when unemployment dips below 5%.
My take is that despite the pols in both parties always chanting the mantra of “full employment”, the Fed thinks in terms of “maximum employment”, which I translate into an unemployment rate at 5% or above. After all, the lower the unemployment rate, corporate labor costs become more expensive, because labor then has greater leverage to demand higher salaries. Now to get to the second part of the “dual mandate”, higher salaries lead to higher inflation, but that higher inflation hurts those with great amounts of capital, more than it hurts workers making higher salaries, since the fortunes of the wealthy are diminished. So it seems to me that the reality is that the Fed has been overly protective of the interests of the economic upper classes, to the detriment of American labor. Interestingly, in the U.S. the definition of the unemployment rate was jiggered at some point defining it as “people who were actively looking for work in the past 6 months.” Actively is the controlling term here. If someone hasn’t found a job after six months of trying, then they are taken out of the “unemployment rate” calculations under the assumption that they’ve sopped looking. This is patent nonsense in a weak economy such as this country has experienced since G.W. Bush’s economic disaster. It is the daydream actually of some conservatives of the Reagan/Romney stripe that believe that the reason for unemployment is laziness or welfare. Yet as ludicrous as it seems this is U.S. policy, that informs U.S. policy making. The real unemployment rate is actually at least twice as high as the standard announced by our government.
This leads to another premise of mine, which is that the Fed is in place to assure that America will never get close to the “full employment” set as a goal by both parties. This makes sense for two reasons, the first being to diminish labor’s bargaining power. The second reason though, is an even a more pernicious one. Workers are always in fear of unemployment. Losing a job and not being able to find another quickly, is and has been a center of fear for workers in America’s shrinking middle class. To be without work for an extended period of time, for most people in the middle class, represents an economic and socials disaster, that loses homes, destroys families and encourages despair. If you instill fear of job loss into employees you make them more pliable and less demanding of higher wages and better benefits. To my mind this is the Feds legacy and its con game. The oligarchs and their media present the Fed as a positive force that keeps our economy going, when in fact the Fed exists mainly to maintain wealth for the wealthy.
Now I did mention the “science” of economics as an enabler of the Fed and its monetary policies, where did my premise come from? First let me say that I believe the “Economics” has never been a “science” but uses “science like” techniques to produce a “pseudo-science” facade, that characteristically calls itself a “Science”. This is true by the way of many of the social sciences and actually some of our hard sciences. To me the problem arises when some scientists begin with a point of view, which they then try to justify with experiments. Now of course all scientists begins with premises, but here the difference is that scientific experimentation and evidence gathering is used to determine actual results on which to base theories. Yet one can do all the experiments possible and yet refuse to accept results that run counter to their original premise. To me those who would do so aren’t real scientists, just as the 1% of scientists who deny climate change aren’t really what we want to call scientists. Returning to Economics then the truth is that the field of economics is dominated by people of political preferences. While some might have great insights, many are blinded to reality by their own particular perspectives.
This is especially true in the pseudo-science of economics where all the best jobs are usually for large financial institutions and corporations. Does one bite the hand that feeds them? At its best economics is an art and an art so tenuous that it amounts to “you pays yer money and yer take yer chances”. To illustrate this I will return to my opening paragraph where I mentioned a news story about the Fed and interest rates. Below are the links I found when I “googled” trying to get a better understanding of what this means and a sampling of quotes from each. Note that neither really talks about the story presented by Brian Williams.
“The Fed said on Wednesday that the economy no longer needed quite so much help. It is the third time since 2008 the Fed has announced such a move, but this time officials and analysts say the decision is more likely to stick, signaling an important milestone in the nation’s painfully slow recovery from the Great Recession.
The central bank still plans to keep short-term interest rates near zero for a “considerable time,” it said in a statement after a two-day meeting of its policy-making committee. And it said it would replace maturing bonds to keep its holdings at about $4.5 trillion.
The bond-buying campaign has helped to fuel one of the longest bull markets in American history. The Standard & Poor’s 500-stock index has risen 131 percent since the Fed started its first round of purchases in November 2008. The campaign has also helped to suppress borrowing costs. The yield on the benchmark 10-year Treasury has declined from 2.96 percent to 2.32 percent over the same period, even as economic conditions have improved.
The impact on the rest of the economy is much harder to assess. The Fed and its supporters say the purchases have held down the cost of mortgage loans and corporate debt, contributing to faster job growth. Other economists dismiss the purchases as inconsequential. And some say the Fed has exacerbated economic inequalities by helping to lift financial markets while the rest of the economy languishes.”
Note that while the NY Times story states that the Feds Bond policy has fueled one the longest bull markets in American history, whether it has helped the rest of the economy is up in the air depending on who you talk to. Later on in this article we see:
“Many House Republicans regard the bond purchases as a form of reckless meddling, and they have passed legislation to constrain the Fed’s flexibility during future downturns. “I’m afraid the long-term legacy of the policy will reflect the harm it has done to our nation’s seniors, savers and all Americans faced with greater uncertainty and the possibility of a Q.E.-induced bubble,” Representative Randy Neugebauer, a Texas Republican, said on Wednesday.
Nonetheless, some experts say the economy remains weak, the purchases remain an effective medicine and the Fed is retreating prematurely. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, cast the sole dissenting vote on Wednesday, arguing that inflation was rising too slowly to stop buying bonds.”
So then we see criticisms from both sides of the question, with no real sense that anyone has any real idea of what is going on. Next we have a well-known economist who disputes the Feds policy of buying bonds, but has no research to back it up, only his premises.
“Michael Woodford, an economist at Columbia University and a leading monetary policy theorist, is among the doubters. “There seems little reason to believe that purchases of long-term Treasuries should be an effective way of lowering the kind of longer-term interest rates that matter most for stimulating economic activity,” he said in 2012 at the Fed’s annual economic policy conference in Jackson Hole, Wyo. This was less a research finding than a statement of principles. Mr. Woodford is the creator of a widely used macroeconomic model that basically assumed the purchases would have no effect.”
What makes one a “leading monetary policy theorist” except perhaps excessive self promotion and tenure at an Ivy League School? Perhaps too, dare we say support from and allegiance bastions of wealth. We see below that there are various sides and opinions about the ending of the bond purchase policy.
“The consequences of ending the campaign are also in dispute.
Federal Reserve officials generally argue that the impact comes mostly from the size of the Fed’s holdings. In this view, the end of purchases is a minor event. Much more important is the Fed’s intention to maintain the portfolio at its current size until after it starts to raise rates.
Others, however, see the flow of purchases as more important.
A third view saw the purchases primarily as a means of reassuring markets that short-term rates would stay low.”
So the “economic scientists” and “economic experts” can’t even agree on the effect of the policy, or that to end it is appropriate. Final words on the changed policy.
“Carl R. Tannenbaum, chief economist at Northern Trust, said he hoped the Fed would emulate the clarity of its retreat from bond-buying as it moved toward raising interest rates.
“I do think this has been a success story,” he said. “I’m hoping that when the time comes to raise interest rates, that they’ll do an equally clear job of foreshadowing that.”
But a voice from the past, the former Fed chairman Alan Greenspan, warned on Wednesday that the next phase of the Fed’s retreat would not unfold so smoothly. Asked whether the Fed could avoid turmoil, he responded, “I don’t think it’s possible.””
So what is the average politically involved person to think when the “experts” can’t even agree about what is going on? The following is a link from a Wall Street Journal article covering the exact same story, with the same differing opinions of “experts”. Fed Closes Chapter on Easy Money . I’ll leave it to the reader to parse out the various sides and make their own decisions.
The bottom line for me is that Economic theory is merely a guessing game that is less informed and accurate than we are led to presume. For the most part, most economists are political creatures, who serve the status quo. There are of course great exceptions to my mind like Krugman, Keynes, Baker, etc. However, I would be less than honest with you if I didn’t aver that my preferences for these economists was because they are more to my political way of thinking. Truth be told, mainstream economics exists to give credibility to institutions like the Federal Reserve, which are actually bastions of wealth protection. It matters not which way they stand on specific policies, because either way they don’t really question the Fed as an institution itself. In a system of governance that pretends to be about rule of the people and rule of law, the Federal Reserve is a misplaced anomaly.
Note: Tangentially, the picture below is the Flag of the Federal Reserve. Why does the Federal Reserve need a flag? Are the “Stars and Stripes” too limiting for their purpose?