Inside The Fed’s Next Move: Shaping The Future of Finance
The comments below are an edited and abridged synopsis of an article by Jeffrey A. Tucker, The Epoch Times
By cutting rates significantly just before an election, the Federal Reserve is taking a risk that could have long-lasting political and economic consequences. With a contentious election looming, featuring a likely contest between the establishment and a populist movement, the Fed’s actions could be perceived as politically motivated, inviting backlash and potential retribution.
The Case for Rate Cuts
While interest rates are not exceptionally high in real terms, inflation has cooled somewhat over the past two years. However, the Fed is now facing another challenge: weakness in the labour market, prompting fears of a looming recession. To pre-emptively address this, the Fed has opted for another round of rate cuts, despite a lack of clear evidence that this move is necessary.
Recessionary conditions are evident in many sectors, with rising bankruptcies and sluggish growth, despite official figures that downplay the situation. The problem is compounded by the fact that inflation is likely being underestimated, while growth is overestimated, a situation that many financial insiders are aware of.
Money Stock and Inflation
One critical factor often overlooked is the increasing money supply. Whether due to relaxed lending standards or the Fed purchasing more debt, the money stock has been growing for nearly a year. As money velocity—the rate at which money changes hands—increases post-lockdowns, this additional liquidity is fueling inflationary pressure. While this might not be immediately apparent in retail prices or financial markets, the underlying effect is monetary depreciation, not real economic growth.
The effects of monetary policy often take 12 to 18 months to fully materialize. Therefore, the reduced inflation we are experiencing today is likely the result of tighter money policies from two years ago. Conversely, the current easing will likely lead to renewed inflationary pressure by next year.
Political Consequences
If the political landscape shifts in favour of Republicans after the upcoming election, there will likely be intense scrutiny of the Fed’s actions. With purchasing power already down by 25% over the past four years, frustration with the Fed is growing. The central bank will be blamed for creating and exacerbating these economic challenges.
The Fed, created in 1913, was intended to stabilize the economy and keep inflation in check, but its track record shows the opposite: more business cycles, higher inflation, and increased government spending. The Fed has become a tool for enabling government excess, providing a blank cheque through its ability to print money.
Reform or Abolish?
Calls for reform are growing. Some lawmakers, like Rand Paul, have long advocated for an independent audit of the Fed to understand where money is flowing. Others suggest that Congress should reclaim some control over monetary policy, reducing the Fed’s discretion over lending and monitoring. A more drastic solution would involve restoring the dollar’s gold-backed status and potentially abolishing the Fed altogether, returning the financial system to a pre-1913 model of decentralized banking and competitive pressures. The lack of political will has been a barrier to meaningful reform, but that may be changing. As inflation likely returns next year and purchasing power continues to erode, more critics will emerge, potentially pushing for the Fed’s overhaul—or even its abolition.
