Today is another adventure in the world of Jay Powell. There are many who show great respect for the Federal Reserve and its Chairman, however this author is not one of them. The problem is that the corruption in that organization is indicative of the overall issues and rot pervasive in Washington, thus the open problems of politicization of economic decisions is obvious to anyone who watches or listens to America’s central bank.
As the US heads into the home run stretch of the election season, the intertwining of the Federal Reserve and politics with an election is unavoidable. There is a ton of historical precedent however, from Trump’s persistent rants at the Fed in 2018 before the midterm elections all the way back to LBJ and the 1960’s.
A Quick History Lesson
The clashes between both political parties and the Fed is not without precedent as is the working relationship between the Executive Branch and central bank on many issues to manipulate economic activity. The reality is that dating back to the era of Federal Reserve Chairman Benjamin Strong who was a close ally of then Commerce Secretary Herbert Hoover the roots of political cooperation have long been part of the system.
In the summer of 1929 for example, two years after Mr. Strong had departed the Fed, the obvious signs that a recession had begun took hold of the US economy. Despite that the stock market surged higher and higher even as the economic contraction began to accelerate. Let me know if this seems familiar to my readers.
Roy Young, who took over for Benjamin Strong in 1927, was under extreme pressure to absorb more government debt by President Hoover and instead of relenting to the President’s election year pressure in 1930, he resigned as Chairman of the Federal Reserve to become the head of the Boston Fed. In that era, the regional Federal Reserve Bank Presidents had more power than the Fed Chair so for him it was a logical move. President Hoover then installed Eugene Meyer as the Chairman of the Federal Reserve who promptly adopted the policy of “Hooverizing” or soaking up more US Treasury debt, primarily on the long end of the curve. The idea was to provide liquidity to the financial system but the structural problems and opposition of the Democrat Party to reforms provided no relief to American society as it slid deeper into recession, then depression.
Fast forward to 1965 when Federal Reserve Chairman William McChesney Martin Jr. elected to raise the discount and prime rates in response to an inflationary surge over 5%. President Lyndon Johnson was outraged as he felt this would stab him in the back heading into the 1966 election. In fact, his actions may well have created a credit crunch and slowing of inflation during that year despite massive fiscal largess by LBJ and Congress. The reality though is that McChesney was the first Fed Chairman to execute a proverbial “soft landing” of the economy despite his political wranglings with the President.
The intertwining of politics and the Fed has a long history from its inception until the modern era so when the media whines that Trump’s bashing of Jay Powell is “unprecedented” in history, they probably are speaking from a position of political bias instead of historical understanding.
The November Election and Recessionary Indicators
The Federal Reserve in this current configuration has an intertwining with the Biden administration which the media deliberately ignores. If one thinks the Secretary of the US Treasury Janet Yellen does not enjoy a cozy relationship with the current Fed all one has to do is look at all of the insider trading which has occurred within the Fed and political elites and the lack of actual prosecutions for illegal behavior to understand how corrupt that relationship has become.
Vice-President Harris’ campaign is the only assurance this relationship between the Congress, Executive Branch and the Fed will continue unabated. This is a prime reason why the upcoming cut today will be attacked as a political move by Trump and with some personal justification. However his hands are not clean either, so ignore his rantings and understand this relationship has been exploited and perverted since the Fed’s inception.
And yes, even Ronald Regan threatened the Fed, so please GOP, don’t act so sanctimonious. President Reagan met with Fed Chair Volcker in 1984 and the excerpt below from a Washington Post story highlights the actions which occur in DC before elections:
In the summer of 1984, when Volcker was Fed chair and in the midst of the painful process of trying to get inflation under control, President Ronald Reagan summoned him to the White House. Instead of meeting in the Oval Office, Volcker says in a new book he was escorted into the library, where Reagan sat alongside Chief of Staff Jim Baker.
“The president is ordering you not to raise interest rates before the election,” Baker said.
Even our heroes have a history of diving into the muck of Fed policy decisions.
Today’s Rate Action
As these pages warned, rate cuts were justified in June and July as economic activity was slowing yet the Federal Reserve sat on its hands proclaiming the cuts were coming but they were “data dependent.” Sadly, the data they were using to make those decisions was revised away after the fact even though there were real time coincident indicators of an economic slowdown for the majority of the country.
The uncertainty of this meeting is best expressed in the chart from Bank of America below:
For the Fed to provide this level of uncertainty based on recent behavior since Yellen’s reign is unprecedented and concerning. What’s worse is the policy errors by Chair Powell since 2022 have only increased in magnitude leading to wild inflationary swings and potentially deflationary or massive dis-inflationary issues moving forward.
This error will be corrected today in the eyes of the financial media, be it 25 or 50 basis points in cuts. But due to the uncertainty and drags on the employment picture, I feel the Fed will have to go big or go home.
Look for the Fed to follow the markets and proceed with a 50 bps cut in the Fed Funds Rate along with a 50 bps in the discount rate. The regional and community banks are in trouble with non-conforming residential mortgages stuck on their books beginning to look shaky and worse, a commercial real estate crisis which is starting to spiral. This cut might panic those who are late to the economic party but in reality, it will have little impact on the broader problems hitting Main Street.
The lag effect, which is a worn out phrase but factually accurate, means that the impact of these cuts will not hit the economy until 9 to 12 months out. But this will set the table to instill “confidence” as the markets like to preach into Wall Street despite one of the largest equity bubbles in history already being expanded.
Unfortunately for the Fed, often times when rate shocks occur in either direction the reaction of the financial system is to turtle, and much like the 1960’s under Chariman McChesney, the banks have already begun to ration credit knocking the feet out under the lowest rungs of American society where the most vulnerable and irresponsible can least afford it.
Prepare for the next ninety days to provide a roller coaster of systemic shocks, irregular economic action, and markets behaving accordingly. Thank you Chair Powell for lighting the fuse on a potential anniversary of the late 1920’s Fed style almost some one hundred years later.
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