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June
03
2023

The World According to a Fed Governor
Robert Aro

On Wednesday, Federal Reserve Governor Philip N. Jefferson offered insights on the economy and the role of the Fed. The irony is evident as we find that those entrusted with overseeing the economy appear to be continuously involved in a journey of self-discovery, yet their understanding often lacks any connection to the real-world economy.

He begins with an overview of the Federal Reserve's approach to financial stability:

A stable financial system is resilient even in the face of sharp downturns or stress events. It provides households and businesses with the financing they need to participate and thrive in a well-functioning economy. It is difficult to anticipate or prevent shocks, but sound policies can mitigate their impact.

Therefore:

At the Federal Reserve, we work hard to make sure that an initial shock in one area of the financial system does not spill over to other markets or institutions and cause severe or widespread strains.

According to the Fed, when there are “sharp downturns or stress events” in the financial system, it is expected that a central bank will intervene to address and resolve the issues. However, what caused these events in the first place is often left unexplored, and there seems to be a reluctance to even consider the possibility that the Fed itself could be a contributing factor to such occurrences.

It is unlikely that the Fed would openly acknowledge itself as the cause of a financial crisis, as doing so would reveal a truth that those in positions of power would prefer to conceal from the public.

And so, we are often presented with red herrings like the narrative of corporate greed or inept bankers, even if only subtly implied, as the Governor illustrates.

The Federal Reserve, using existing regulatory and supervisory tools, is working to ensure that banks improve and update their liquidity, commercial real estate, and interest rate risk-management practices.

These distractions divert our attention from the underlying systemic issues as they put the fault in poor practices by banks, rather than the market distortions caused by the Fed.

The Governor offered little in the way of explanation for the deceleration in the pace of rate hikes, even in the face of ongoing high levels of (monetary) inflation.

Since late last year, the Federal Open Market Committee has slowed the pace of rate hikes as we have approached a stance of monetary policy that will be sufficiently restrictive to return inflation to 2 percent over time.

Despite the Core Personal Consumption Expenditure reaching 4.7% over the course of a year, as reported by CNBC, it’s perplexing that a more aggressive approach to raise rates until the 2% target is achieved hasn’t been implemented. Instead, there is a growing sense that a rate pause, or cut is on the horizon.

Perhaps this is why he reiterated:

A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle. 

This follows the idea of not believing anything until it has been officially denied. However, it is important to recognize that the statements made by the Fed Governors often serve as a form of damage control, quasi-economic propaganda, or a means to alleviate the press burden on Chair Powell. With the upcoming June 14 meeting just two weeks away and the current probability of no rate hike standing at 62% according to the CME FedWatch Tool, it remains to be seen whether the Fed has finally abandoned its pursuit of raising rates to “fight inflation.”

 

Robert Aro is a chartered professional accountant (CPA, CA) from Toronto who writes for the Mises Power and Market blog on issues surrounding the Federal Reserve and central banking. He is currently enrolled in the Mises Institute’s graduate school, working toward his master of arts in Austrian economics. In 2021, Robert placed third in the Free Private Cities short story contest with "Express to City Center ONE," which explores the endless possibilities a stateless society can offer the world. Passionate about writing and economics, he intends to publish in the future.

You can follow Robert under the name Econ Circus on Twitter.

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