Federal Reserve

Federal Reserve Is A Private Institution – Powell Is Not A Public Servant

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At his press conference earlier this week, Fed Chair Jerome Powell said the following… “The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals, and, really, keeping our heads down and doing our work,” he added. “That is how we best serve the public.” 

Powell’s repeated use of the personal pronoun “our” rates special attention. I don’t think he means it in the collective sense. In this case, “our” means them – not us. Admittedly, his appending claim “…how we best serve the public” is meant to allay fears and present himself and the Fed in a more positive light. Nevertheless, investors and others need to know and understand some things about the Federal Reserve’s origin and purpose.

From The Creature From Jekyll Island (G. Edward Griffin)…

“Back in 1910, Jekyll Island was completely privately owned by a small group of millionaires from New York. We’re talking about people such as J. P. Morgan, William Rockefeller and their associates. This was a social club and it was called “The Jekyll Island Club.” That was three years before the Federal Reserve Act was finally passed into law. It was November of that year when Senator Nelson Aldrich sent his private railroad car to the railroad station in New Jersey and there it was in readiness for the arrival of himself and six other men who were told to come under conditions of great secrecy. For quite a few years thereafter these men denied that any such meeting took place. It wasn’t until after the Federal Reserve System was firmly established that they then began to talk openly about their journey and what they accomplished. Several of them wrote books on the topic, one of them wrote a magazine article and they gave interviews to newspaper reporters so now it’s possible to go into the public record and document quite clearly and in detail what happened there.” 

PURPOSE OF THE FED 

The purpose of the Federal Reserve is to provide a structured system whereby its member banks can create and lend money in perpetuity. The Fed accomplishes this by continually expanding the supply of money and credit.

The Federal Reserve exists for the benefit of the banks and bankers.  Its purpose and motivation is not aligned with ours. The Fed’s objective is to facilitate the ongoing creation of money and loans which generate interest income. (see The Federal Reserve – Purpose And Motivation)

Our financial problems are the result of intentional inflation created by the Fed. Cheap and easy credit has exacerbated the fragility of the entire banking system.

Why in the world would the United States Congress approve a bill which authorized the inception of a private institution whose purpose and goals had nothing at all to do with serving the public? Besides, the government (President Andrew Jackson) had promised there would never be another National Bank. Here is why the Federal Reserve exists today…

COLLUSION AND SECRECY 

In order to allay the fears of the American public, and convince Congress that it was in the best interests of the country to authorize by law the existence of this ‘private’ institution, it was necessary to effect a campaign at two specific levels: grass roots, i.e., the American public; and, behind closed doors, i.e., politicians and the U.S. government.

The message delivered was that the mission of the Federal Reserve was to actively manage the stages of the economic cycle – recession, depression, recovery, prosperity – and, thus, avoid the extremities of panics and crashes that had plagued the banking industry and put depositors at continual risk. (This has morphed into a two-pronged goal of focusing on 1) maximum employment and 2) stable prices.)

The statement of intention to manage the stages of the economic cycle was born out of necessity. Members of Congress would not vote in favor of any bill authorizing existence of a central bank without their constituents approval. If the American public thought there were benefits that could outweigh their fears, and if enough members of Congress felt similarly, and perceived that public support was sufficient, then possibly the bill would pass.

Support of business and the general public notwithstanding, approval was not assured. In exchange for support by the government (Wilson administration including Treasury officials and others), another secret meeting was held at which an agreement was made that if the Federal Reserve was granted a legitimate birthright, all future government funding was assured.

In other words, the Federal Reserve underwrites and guarantees that the US Treasury/Government will get whatever funds it needs; a promise made over one hundred years ago. (see U.S. Government Is Beholden To The Fed & Vice-Versa)

PRIVATE INTERESTS VS PUBLIC POLICY 

So, what did the bankers get out of this? The answer is found in one word. Money.

More specifically, they got control over the money. They were now legally authorized to be everyone’s sugar daddy, and, ostensibly, they had the support of the United States government and its citizens.

Banks lend money to individuals, companies, and governments. They also lend money to countries, revolutionaries, and global conglomerates.

The Fed is not particularly interested in the profitability or welfare of  smaller, individual banks, though. It was intended originally that the Federal Reserve could better supervise and contain damages spawned by errant actions of independent banks, but the primary goal was to create an environment that would allows the banks, especially big, power center banks, to operate and function without interruption, and on a hugely, profitable scale.

With the inception of the Fed, the bankers could protect the interests of their elite hierarchy and retain control over the money supply, lending activities, funding their own special interest activities, and make tons of money doing it.

JEROME POWELL VS DONALD TRUMP

President Trump is now demanding (again) that the Fed lower interest rates. This is what Powell had to say about it…

“I am not going to have any response or comment whatsoever on what the President said,” Powell replied. “It is not appropriate for me to do so.”

Fed policy (and purpose) is not designed to support off the wall “demands” by politicians (or investors, for that matter). A similar “demand” was made during Trump’s first term. It went nowhere. Two years into his successor’s term in office, the Fed began raising rates; much to the chagrin of a majority of outspoken enthusiasts from both political parties.

The current difference of opinion between Mr. Powell and President Trump could be entertaining, though.

CONCLUSION

Regardless of claims to the contrary, the Federal Reserve does not exist to serve the public interest. The Federal Reserve is a banker’s bank which exists for the purpose of 1) creating and lending money and 2) collecting interest in perpetuity.

As valid as are the calls to end the Fed, it likely won’t happen. The United States government would lose its pipeline to unlimited funding. The result would be financial and economic pandemonium.

The road ahead, though, will bring financial and economic devastation anyway. Right now, the Fed has everything it can do to handle the unintended consequences of its own errant policies over the past century. Fighting the negative effects of more than one hundred years of intentional inflation is a full-time job. (see Federal Reserve – Conspiracy Or Not?)

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

Liquidity Problems Could Overwhelm Inflation’s Effects

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LIQUIDITY PROBLEMS – 1929 

In 1928 and 1929, the Fed raised interest rates for the purpose of curbing rampant speculation in stocks. At that time, investors could borrow as much as 90% of the stock price for their proposed investment. The banks were just as aggressive as investors and were happy to oblige.

Raising rates did not slow stock speculation by investors or banks, however.

What it did do was cause a slowdown in economic activity. Thus, as economic activity declined, the stock market continued its rise, unabated.

As the decline in economic activity continued, both businesses and consumers were affected negatively. The money was available for investors to buy more stocks, albeit at a higher cost; but, businesses and consumers struggled with liquidity problems.

STOCK BUBBLE BURSTS 

The crash in the stock market brought illiquidity issues to light. Layoffs in the financial industry were numerous and swift. The ranks of the unemployed ballooned.

If you were an investor who had purchased stock with 10% down, it would take only a 20% decline for you to have lost twice as much as your original investment.

Now, imagine the plight of the banks who had lent money to investors using stocks as collateral. The collateral was worth as much as 30% less after one day of trading. Bank failures became almost commonplace during the Great Depression that followed.

FED RESPONSE

As might be expected, the Fed did purchase government securities in the open market and lowered the discount rate. It also assured commercial banks that it would supply needed reserves.

Unfortunately, “too little; too late” became the common descriptive phrase used when referring to Federal Reserve response to the crisis which it had caused. That is because the economic devastation was overwhelming.

Unemployment soared to as much as 25% and prices declined (deflation) by more than one-third. The aggressive, free-spending social programs of the 1930s government could not stop the slide and contributed to the length and breadth of the depression. At the depths of the Great Depression in 1932, the stock market had declined by 90%.

The stock market crash was not the cause of the Great Depression, though. The Great Depression was caused by a Fed policy of higher interest rates. Whatever the intention or merits of the action (the higher rates were imposed for the purpose of curbing rampant stock speculation), it led to a reduction in economic activity which was well underway before stocks crashed.

INFLATION, DEFLATION, AND THE FED 

The Federal Reserve officially implemented an interest rate policy of “higher for longer” almost three years ago. Rates moved up rapidly and bond prices have lost one-third to one-half of their value since then, depending on length of maturity. (see “And So Rates Will Be Higher” – Jerome Powell)

It matters not what the intention was or whether it was correct. What matters at this point are the circumstances in which the Fed finds itself now.

Most, or all, of our serious financial and economic problems are the result of a century of intentional inflation. The effects of that inflation lead to a loss of purchasing power in the currency (U.S. dollar). When the Fed intervenes in the markets either directly (by purchasing or selling securities) or indirectly (manipulating interest rates), it creates distortions which have ripple effects and are amplified.

In addition, those effects are unknown with regards to extent, duration, and timing. Remember being surprised at the higher increases in consumer prices post-Covid and economic shutdown. Those increases are attributable to government (and central banks) actions in response to the ‘pandemic’.

The economic shutdown was forced upon society by government – rightly or wrongly. As a result, the decline in economic activity led to huge financial and economic problems for society, including supply chain issues. These problems were met with phenomenally huge financial largesse (inflation) by governments and central banks, which, in turn, led to higher consumer prices (effects of inflation).

After more than one hundred years of trial and error, it is apparent that…

  1. The Federal Reserve causes the problems and crises with which it continues to grapple.
  2. The Fed is doomed to a role of reacting to crises of varying intensity (worse) and frequency (more often).
  3. Serious deflation and economic depression would overwhelm efforts by government to reverse the effects or contain the damage.

CONCLUSION 

There is no path to financial stability from the current point that does not involve a cleansing of huge magnitude. The cleansing will be accompanied by serious financial and economic pain. The Fed is continually dancing with its own devils amid music which is horribly out of tune. The only option left is to wait until the music stops. (also see If The Markets Turn Quickly, How Bad Can Things Get? )

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

Bond Investors To The Fed – “Not This Time”

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RE: FED POLICY…

“I think instinctively – I can’t prove this, we’re going to learn about this empirically – but it seems to me that the neutral rate is probably higher than it was during the intra-crisis period. And so, rates will be higher.”  (Jerome Powell, July 2024)

Powell’s comments were from an interview conducted two months prior to the announcement that the Fed Funds target rate was lowered after more than two years of higher interest rates.

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Fed Balance Sheet Continues To Decline

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FED BALANCE SHEET 

Below is a chart posted and updated regularly by the Federal Reserve Bank of St. Louis…

As can be seen in the above chart, total assets of the Federal Reserve Bank have declined by 22 percent since peaking in March 2022. The aforementioned peak was nearly simultaneous with the announcement by the Fed in March 2022 of a change in Fed interest rate policy.

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All Hail The Fed – A New Day Dawns

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ALL HAIL THE FED!

As investors continue to gobble up stocks and the dollar prices of most assets continue to climb, it would appear that all is well. Concerns about weakening economic activity and recession have been moved to the back burner. Now, the focus is squarely on inflation.

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“And So Rates Will Be Higher”- Jerome Powell

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Jerome Powell says “rates will be higher”. I believe him. I don’t think most others do. Investors, especially, need to pay attention.

FED POLICY

I have read the text of Powell’s interview. His comments are consistent with remarks he has made over the past two years during the Fed’s  current campaign to see interest rates returned to a higher, more historically normal level…

“I think instinctively – I can’t prove this, we’re going to learn about this empirically – but it seems to me that the neutral rate is probably higher than it was during the intra-crisis period. And so, rates will be higher.” 

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Chair Powell’s Speech Re: Fed Independence

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In Fed Chair Powell’s speech this past Wednesday, he spoke about Fed monetary policy and also talked about the role of the Federal Reserve. In addition, he referred directly to the matter of the Fed’s independence and the necessity of maintaining that independence. In effect, he warned Congress about efforts to involve the Fed politically or to attempt modification of the independent monetary policy role of the Fed.

Below are selected excerpts from the speech which are followed in turn by my comments…

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Investors Are Too Anxious For Rate Cuts

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INVESTORS ARE TOO ANXIOUS FOR RATE CUTS

Anxious investors seem to be expecting more than has been “promised” regarding interest rate cuts. Some (quite a few) seem overconfident that the long awaited pivot is a done deal. In addition, anticipated results from the expected cuts are already built into the markets to a large degree. Here are some thoughts worthy of consideration…

1) Suppose the Fed cuts rates later this year, but not as much as expected. Is cutting interest rates 1/4 or 1/2 percent all that is necessary to kick the gravy train into high gear?

2) Is a Fed pivot a temporary thing? Maybe the Fed cuts a quarter point once or twice, then re-pivots and begins raising rates anew.

3) What if the Fed doesn’t cut rates at all?

ANTICIPATION IS MAKING ME WAIT

(Thank you, Carly Simon, for the perfect subheading.) The possibility of three rate cuts in 2024 has been amplified to mean that the Fed will cut rates this year – 2024. The rate cuts most everyone is expecting are the same rate cuts that were assumed and expected for most of last year – 2023. Isn’t it possible that rate cuts could be postponed again? How long can elevated stock prices and other assets maintain their lofty levels based on the expectation of lower interest rates which continue to be expected but not realized?

IF THE FED PIVOTS, MIGHT IT BE TEMPORARY? 

Overlooked in the rush by everyone outside of the Federal Reserve to talk interest rates down are comments by Fed Chair Powell which include the phrase “higher for longer”. Those who are so intent on expecting lower interest rates might do well to consider not just the possibility, but the likelihood of rates remaining higher for longer. 

Rates were intentionally forced lower by the Federal Reserve over nearly four decades prior to the official announcement their campaign to raise interest rates in March 2022. During those four decades the Fed moved back and forth both higher and lower regarding interest rates, but all changes in direction were temporary within a long-term decline in rates lasting nearly forty years.

The emphasis on “lower for longer” took interest rates close to zero and created an addiction for cheap money and credit. The artificially low interest rates that fueled the addiction were not normal. They were abnormally low historically and created huge bubbles in asset prices. Financial and economic volatility increased and the U.S. dollar suffered a loss of credibility and purchasing power.

As a result, the Fed was forced to change its interest rate policy to protect and defend the dollar. Not out of a patriotic sense of duty, but in order to save the financial system. It may be too late for that.

That brings us to our final point. What if the Fed doesn’t cut interest rates?

WHAT IF THE FED DOESN’T CUT RATES?

It is very much a possibility that the Fed might not cut rates at all. The inclination to do so seems to change from week-to-week and month-to-month along with changing economic data and statistics. Jerome Powell has been consistent in his comments that “higher for longer” is the game plan. Maybe rates get kept at current levels for awhile longer.

At their current level, interest rates are still abnormally low on a historic basis. Historically normal interest rates average 7-8 percent. We are not there yet. And with the extreme lows for interest rates experienced for several decades, there is a significant amount of inefficient allocation of money and resources that needs to be reallocated. That will result in varying degrees of financial and economic pain.

CONCLUSION 

The Federal Reserve has a history of market intervention and manipulation. The Fed’s interest rate policy is a manipulation ‘tool’. The market intervention and manipulation is ongoing. The overriding purpose is to create and sustain an environment that enables banks to continue to lend money and collect interest in perpetuity.

Often, though, application of the ‘tool’ is a defensive reaction to unintended and unexpected financial and economic events. For many years now, the Fed has been occupied with battling the negative consequences of it previous policies and actions. They may be in the driver’s seat, but the vehicle is out of control.

Stormy seas are ahead. If the Fed cuts too soon or too much, the cheap bubble juice will create more inefficiencies and extreme volatility. Right now, just the expectation of a return to cheap and easy money/credit has blown bubbles in almost everything priced in dollars. At some point, bubbles get popped. That is something the Fed is trying to avoid.

Interest rate cuts are not a sure thing. Investors could be in for a nasty surprise. (also see Federal Reserve and Market Risk)

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!

Two Reasons The Fed Manipulates Interest Rates

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There are two reasons the Fed manipulates interest rates. Before we talk about those reasons, though, it is important to understand that the Fed does not actually control interest rates. Interest rates are set in the bond market. Buyers and sellers (traders) bid for and offer bonds for sale. When a buyer and seller agree on a price, the trade is finalized. The specific price, in conjunction with the face value of the bond (always $1000) and the stated coupon rate attached to the bond (and the length of time until the bond matures for yield to maturity) factor into the formula which determines the current yield, or what might be called the bond’s current interest rate.

In addition, the Fed does not set the fed funds rate. The fed funds rate is the rate which member banks (banks which belong to the Federal Reserve system) pay to borrow money from each other in an overnight market. What the Fed does is announce their “target range” for fed funds.  The Fed hopes that member banks will limit their lending activity with each other to the publicly announced target range.

The Fed has direct control over only one specific interest rate – the discount rate. The discount rate is the rate which member banks pay to borrow money directly from the Federal Reserve. The specific rate which the Fed charges to member banks at its “discount window” can and does influence trading in the fed funds market.

The extent of the Fed’s influence is limited mostly to short-term rates, such as those above. Since they do not actually control interest rates, particularly long-term rates, how do they influence trading activity in the bond markets? They talk a lot. This should be obvious to most observers. A more critical factor, though, is the Fed’s active participation in the bond market, buying and selling huge amounts of U. S. Treasury securities (and CMOs more recently).

TWO REASONS THE FED MANIPULATES INTEREST RATES

The history of the Federal Reserve is a history of interest rate manipulation. Specific interest rate policy of the Fed, and subsequent compliance (go along to get along) in the credit markets, resulted in a trend of lower interest rates dating back nearly four decades. The trend began in the 1980s and continued until just a couple of years ago. Unfortunately, the collateral damage from “cheap and easy money (credit)” led to crisis conditions in the credit and foreign exchange markets.

The specter of inflation seemed ready to overwhelm the markets and the economy; and, as they have done in the past, the Fed reversed direction on interest rates. Rightly so, some would say; except that the Fed has been playing the same game since its inception in 1913 – and they have a losing record. (see Fed Interest Rate Policy – 2008, 1929, And Now). So, why does the Fed continue to play a game they keep losing?

There are two specific reasons. The first is because it is in their own self-interest.

The Federal Reserve is a private institution. It is a banker’s bank. The Fed provides an environment which allows banks to create money in perpetuity and collect interest ad infinitum.

Fed manipulation of interest rates is a misguided effort to extend and control the prosperity phase of the economic cycle. Over the past century, the effects of inflation created by the Federal Reserve has increased the volatility and frequency of financial catastrophe and economic dislocation. Hence, the Fed spends most of its time putting out fires. This, of course, conflicts with and limits the Fed and member banks abilities to grow their lending capacity and income stream from the interest they collect on their “funny money”.

The second reason for ongoing Fed manipulation of interest rates is related to the first reason; and, it involves the U.S. government.

Before the Federal Reserve was authorized by Congress, representatives of the cabal of bankers and politicians that were trying to get specific legislation through Congress and to the President’s desk for signature met with some highly placed government officials. At that meeting, a promise was made that guaranteed the U. S. government would always have the funds it wanted – if the bill passed which authorized the origin and operation (private) of the Federal Reserve. The legislation passed.

When you hear politicians today, or at any time, complain about the Federal Reserve, you can be relatively certain that any attempts by Congress to thwart the Federal Reserve and its operations won’t get very far. Bite off the hand that feeds you? Kill the golden goose? I think not.

The Federal Reserve is very happy with the arrangement, too. Biggest source of income to the Federal Reserve? Interest on U.S. government securities. That is not a coincidence. It is the perfect example of a win-win situation. (see US Government is Beholden To The Fed And Vice-Versa)

CAUTION FOR INVESTORS 

The reason the Fed began its attempt to raise interest rates is because they were at a juncture where continued easing could again trigger huge declines in the dollar. On the other hand, rising interest rates increases the risk of potential implosion in the credit markets.
We said earlier that the Fed spends most of its time putting out fires. Federal Reserve activity for the past several years is based on fear. They are afraid of triggering a complete collapse in the U.S. dollar, yet they are also afraid that their efforts to restore interest rates to a more historically normal level will be rejected and the credit markets will collapse and usher in economic depression.
The irony is that they are trying to manage the effects of inflation that is of their own making. And doing a poor job of it.
With history as a guide (see The Fed’s Changing Game Plan) and allowing for the lack of Fed success over the decades, it seems that betting on a “Fed pivot” to trigger investment profits amid new bull markets holds more potential risk than reward. (also see Federal Reserve – Conspiracy Or Not?)

Investor Expectations Versus Fed Intentions

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 INVESTOR EXPECTATIONS VERSUS FED

Quite a few people are convinced that they know what the Fed will do next, and why. How do they know? Is it really that obvious?

There are more questions to consider, too. Will the effects of continued actions, or changes for any reasons, achieve the desired results? If they don’t, what comes after that?

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