The World According to a Fed Governor
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:
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.
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.
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:
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.”
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