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Interest Rates, Inflation, the Federal Reserve and Federal Spending (updated)

By June 13, 2023Commentary

Several news stories caught my eye this morning that all relate to a set of related topics.  One in the Wall Street Journal described the Federal Reserve Board’s dilemma as it faces conflicting data and objectives.  The latest inflation numbers released today supposedly show that inflation, while high compared to the last two decades, has lessened from last year.  Given the issues with data provided by other government agencies, I am dubious about the accuracy of inflation numbers.  One thing that is clear is that wages have not kept up with prices that people pay for the basics–housing, food, medical care, transportation–so real income and standards of living are declining for the average person.  The FRB is supposedly grappling with the link between prices and wages–do higher prices drive demands for higher wages or vice versa, and trying to figure out how this impacts inflation and its policy.  And it is concerned, as I also noted, about the effect of higher interest rates on bank solvency.

As I said yesterday, I don’t think that the FRB has the control over interest rates that it used to.  When you have as much debt as the US does floating around, persuading people to buy even more of it, with no sign of real fiscal discipline, is an issue.  Buyers of the debt are going to insist on higher interest payments.  And those interest rates do themselves impact inflation.  It is a complex system and I don’t have a high level of confidence that the FRB has the skills to either understand and manage the outcomes or to effectively deal with the politics.

Here is the Federal Reserve’s real problem:  the Federal Government keeps spending money it doesn’t have, running up huge deficits adding to an already massive debt–over $30 trillion.  That deficit spending forces the US Treasury to sell more debt, now at much higher interest rates than in recent years, and the interest on that debt adds even more to the deficit.  Chairman Powell needs to be much stronger in telling Congress to get its act together and stop spending; he should hammer that every single day.  He should stop doing anything to facilitate deficit spending, meaning he should continue to shrink the Federal Reserve’s ownership of US debt and other securities, a practice that should be banned in any event as a manipulation of private markets.  The biggest underlying economic issue the US has is its deficit spending and debt.  It will crush us and our standard of living.  It may be too late to avoid at least some consequences of that debt.  But we have to stop making the problem worse and the only way to do that is to immediately end deficit spending.

Update:  I forgot to mention in the original post one of the other big spending issues–fraud and waste.  The AP was out with an analysis today that as much as $280 billion of the CV-19 relief package was stolen by fraudsters and another $125 billion also wasted or otherwise misused.  This reflects massive government incompetence and is not unique to CV-19 spending.  If we could manage to eliminate this category of spending, much less recover some of what was stolen, it would alleviate some of the deficit issue.


Join the discussion 2 Comments

  • Rob says:

    Powell is doing what you prescribe. He spends more time on Capitol Hill than any of his predecessors. And the politicians don’t like it. Powell spent most of his life as a banker – Yellen, Bernanke, Greenspan, and Volcker were never bankers, they were college faculty/economists.

    So basically our society now has two full generations of adults who have never lived under a rational Fed. Volcker actually started the mess – raising interest rates (and these are just the rates the Fed charges banks) was the right thing to do at the time but he was reckless about it. (Not that he was the first.) BY jacking up rates so quickly, he put Savings & Loans out of business – they were in the business of borrowing short and lending long (by government regulation). But Volcker jacked up rates so fast the interest collected by S&L’s from existing loans could not cover the new borrowing they had to do. Long-term loans/bonds were typically held by S&L’s, pension funds, and small mutual insurance companies. All 3 of those entity classes were turned upside down over the last 40 years – S&L’s either went belly up or reorganized as banks, insurance companies de-mutualized, and pension funds drifted toward equities and riskier assets and away from safe long-term bonds. Now it is upside-down world. Reversing course is like turning a large ship around, you need very wide berth to do it, you need to know what obstacles are in the way that make you stop turning until you have more room, etc. And Congress is never going to voluntarily spend wisely, their power base comes from not doing so.

  • Bob Harper says:

    Everyone should read Judy Shelton’s Op-Ed piece in the June 13 edition of the WSJ: The Fed’s Monetary Policy Tool Kit Needs an Overhaul.

    It is a great shame that TDS prevented her from being confirmed to the Fed’s Board of Governors.

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