The Fed raised interest rates. We all saw it coming. Despite acting predictably, the nation’s central bank has still fallen under harsh scrutiny, and important questions are being asked. While the president and Congress consider overhauling the way the Fed operates, it’s high time we discussed the nature of the fed, why it’s there and what is likely to happen under Trump.
What Is the Fed’s Purpose?
Originally, the Federal Reserve was established as a source of monetary lending. It was often a last resort, as it’s government position did not require it to lend competitively, but it was still a source of liquid assets that could be used to spurn growth and stave off economic fallout.
The gradual change of monetary policy over many decades brought with it changes to the Fed. The biggest came when the gold standard ended. The flexibility that was introduced to currency eventually gave the Fed more power, as its holdings were large enough to influence interest rates.
Under the policy of Keynesian Democrats, this power was deliberately expanded, and the Federal Reserve came to its current standard, which primarily dictates interest rates and tries to control inflation and production through excessively complicated tactics.
When Dodd-Frank took effect and removed the Fed’s freedom to lend to non-banks, its original purpose was further obfuscated, rendering the answer to our question even more muddled and obscure. The short answer is that the Fed has a poorly defined, unclear purpose that is loosely tied to regulating banking and investment.
What We Know Today
The Fed confidently raised interest in their March meeting. While it’s too early to assign causality, stock growth for the month has lagged far behind the previous months since Trump’s election. The full cause is always complicated, but there is no doubt that the interest spike is a contributor.
If job growth mirrors the stock market, then the Fed is sure to come under fire, and it could cause them to backpedal on their current agenda. That said, the bulk of Trump’s policy is excellent for economic growth, so the rate at which he can get bills through Congress will have a stronger impact on the economy than actions taken by the Fed.
What this really tells us is that the Fed is still likely to raise interest two to three more times this year. Only a major calamity or a successful delay by Congressional Democrats could change that course.
Aside from interest, we can also note a current trend. Mistrust of the Fed has only risen since the crash of 2008, and Trump and the populist movement behind him are beholden to that mistrust. Under current law, the Fed has minimal oversight and over a trillion dollars in holdings.
Trump has already hinted that he is ready to change how the Fed works. More importantly, he seems to have bipartisan support in favor of bringing more regulation or oversight to the Fed. How that will manifest is still difficult to predict.
Looking Ahead
If the Fed is going to act as a regulatory office, it seems reasonable that it should operate similarly to the EPA, FDA or any other major regulator. The only way to make that possible is to change how the bank is funded.
Currently, they operate solely on the interest generated by their substantial treasury stock. While that seems like an innocuous way to fund a government body, it’s important to remember that the interest is in fact paid via tax dollars.
One of Congress’s more popular agendas would be to reduce the Fed’s access to bonds and instead fund them via a Congressional budget, much like all of the other regulatory offices. This would be a surefire way to apply accountability, which is something the Fed has never truly faced.
That oversight, of course, comes with its own downside. While it is pleasing to imagine a Trump committee bringing the Fed in line with reasonable economic policy, a future leftist regime would have equal power to manipulate the Fed to their own ends.
Much like Obama’s abuse of power is now being used to undo many of his changes, reducing the Fed’s independence is not a risk-free action. That said, the Reserve has not acted impressively in recent memory despite that independence.
Ultimately, it’s still difficult to predict how aggressively Trump will attack the Fed. It’s within reason to think he will act, but it’s something that is a lower priority. He’s made it clear that health care, immigration, taxes and infrastructure will be his primary targets. Congressional opposition could slow his progress and leave little time for fixing the Fed. We’ll have to wait and see, but you can trust that the next few months will be tense for Yellen and her people.
Regards,
Ethan Warrick
Editor
Wealth Authority
