The Fed Asserts Its Independence—from Trump
Our "independent" central bank has an interesting habit, made obvious by its actions throughout the Biden administration. It is a symptom of a much bigger problem that affects all areas of life.
The Federal Reserve, the nation’s central bank, is independent of the federal government—or so they keep telling us. The actions by the Fed’s board of governors often indicate otherwise. The Fed generally seems to think its most important job is to support big government.
The markets had long expected the central bank to lower the Fed funds rate by another quarter of a percentage this month, and the board did exactly that.
The Fed accompanied its interest rate cut announcement, however, with strong indications that it is going to keep the money supply tighter than expected in the coming year. “Heading into the meeting, traders had expected that the Fed would cut interest rates twice next year. Interest-rate futures now indicate a strong probability that the Fed will cut rates only once in 2025, or not all,” The Wall Street Journal reported. Just a few weeks ago, investors were expecting four rate cuts in 2025.
The markets reacted with dismay, the Journal reported:
The blue-chip index gave up an early gain and posted its largest slide since August after Fed officials lowered rates by a quarter percentage point and disappointed investors by signaling just two more cuts next year. The move marked the index’s 10th straight decline—its longest streak of daily losses since Oct. 4, 1974.
Investors’ expectation for lower rates ahead was among the factors that powered stocks to records in recent weeks, with the Dow industrials hitting an all-time high above 45000 earlier in December. On Wednesday, the prospect of fewer cuts sparked broad declines, driving all 11 sectors of the S&P 500 lower.
It was a rapid and powerful “correction”:
Source: The Wall Street Journal
A cynic might think that the Fed’s governors carefully calibrated the money supply over the past four years to allow a rapid expansion of government spending, slow down price inflation after the big(gest) spenders lost control of one house of Congress, keep it as steady as possible as the 2024 election year approached, and then loosen the money supply and feed the economy more fuel in the months before the election, all to the advantage of the bigger-spending political party.
The behavior of the Fed during the Biden presidency provides no reason to doubt that interpretation.
When the Biden administration was overspending with a historically unprecedented amount of recklessness during 2021 and 2022, with the economy already strong and in absolutely no need of a “boost” of government largesse (which in fact is never needed), the Fed financed it with an eager expansion of the money supply.
The Fed continued expanding the money supply very rapidly for the two years after the economy recovered in the final quarter of 2020—when the central bank should have stopped its monetary expansion. The Biden administration had just taken office in January 2021, however, and the new, hard-left administration wanted to spend much more taxpayer money, supposedly to restore the U.S. economy, though the economic problems brought on by the lockdowns had already ended. The obvious true motive for the spending was to buy votes from various Democrat interest groups.
There being no way for Biden and the Democrats to extract 25+ percent of GDP from the public in taxes, they borrowed the money, raising the federal deficits and debt to peacetime, noncrisis record highs. The Fed accommodated that plan, which was a political scheme, not an economic recovery action as the leftist politicians in Washington, D.C., pretended it was.
After unleashing the worst inflation since the 1970s, and with a presidential election year approaching, the Fed slowed the money train in 2023. The central bank raised interest rates rapidly and cut the money supply just enough to dial it back toward the central bank’s announced goal of 2 percent annual inflation, while not getting anywhere near that number according to its favorite measures.
As the 2024 presidential and congressional elections approached, the Fed eased up on the money supply and cut interest rates, declaring that though inflation was still above its target, it was close enough to allow some monetary loosening. The stagnant economy Biden and Harris had brought on through its wild spending spree and regulatory strangulation was making voters very angry.
Now, with Donald Trump about to take office next month, inflation is a big worry again over at the Fed, even though it has been trending downward for the past two years:
Source: author, using data from St. Louis Fed, https://fred.stlouisfed.org/
This is precisely the kind of apparent cooperation in expanding centralization of all sorts of power that is making people increasingly skeptical toward elites in all areas of life.