Recent Chaos Has Made the Fed Act In Nervous and Unusual Ways
That’s quite a headline to unpack but follow along and the connections will become clear.
When the Fed (Federal Reserve) fights inflation it does so by undermining workers. Huh? They raise interest rates which makes it more expensive for businesses to start or grow, which leads to fewer job openings. That means there are more applicants to apply for each opening meaning businesses don’t have to offer sweet deals to find workers. See my previous pieces (link1, link2, link3) explaining this further, including quotes from the Fed acknowledging this is how it works.
Chairman Powell just said they are looking at the, “possibility that inflation could be volatile going forward”. More of his statements make it clear they are anticipating inflation spikes created by general business uncertainty, and by supply chain choke periods, also brought on by uncertainty. Where does the uncertainty come from? It’s obvious but we’ll come back to that.
If they do have to raise rates to fight inflation then, well, see that previous paragraph about how it works.
The uncertainty has created some crazy actions by the Fed. They just bought a large volume of bonds. Without going into detail, that’s something they usually do when trying to go the other way, trying to heat up the economy at times that’s needed. The opposite of fighting inflation. So are they going in two directions at once? Kind of. That’s what a chaotic economy brings. But it’s a little worse than that.
They did this without telling anyone. Only investment companies that track many things about the economy happened to notice. That’s odd because usually the Fed makes a lot of publicity about it when they do this because that’s part of the idea. To let everyone know when the Fed is actively trying to heat up the economy so everyone gains confidence and jumps on the growth bandwagon.
So why did they do it now, and quietly? The Treasury Department had a sale of bonds, which they do constantly. They didn’t sell nearly as many as they would normally. Why? Because of economic uncertainty. The U.S. Treasury having trouble selling bonds? That’s such an oddity that it could spook investors and business planners, so the Fed quietly stepped in to buy a bunch and make things look normal.
Get that. The Fed had to pull this, “Don’t look behind the curtain. Nothing to see here. Just go on about your business as normal” move because things are in such an unpredictable state.
Why are things in that state? Let’s go straight to the most authoritative of sources. The following are recent quotes directly from the Fed’s media releases of statements from Powell, and from interviews with Powell, and from a member of the Fed board, Austan Goolsbee.
Powell said the increased likelihood of inflation is, “really due to the tariffs” and called it, “tariff inflation“. Regarding the state of the economy generally he said there was, “heightened uncertainty”.
Tariffs are expected to cause the supply chain to become erratic. “We may be entering a period of more frequent, and potentially more persistent, supply shocks — a difficult challenge for the economy.”
As part of dealing with this the Fed is considering tweaking its policies to be less focused on keeping unemployment low, or as they put it, “shortfalls of employment“, and more focused on fighting inflation. That is, more damage to working people might have to be tolerated in order to deal with higher inflation.
That’s because they may find themselves stuck in a Catch-22 where, “Prices are going up while jobs are being lost and growth is coming down.” Or as one headline put it more clearly, “Higher prices or higher unemployment? The economy could face a no-win dilemma”.
Powell plainly states what the price of this will be, “We understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses.”
Oof! That’s a lot of hard, direct statements. You could suspect those quotes are cherry picked but read the sources and you’ll find they reflect the overall Fed message.
All of this because of confused and chaotic policies. And that because too many people were either conned into, or willfully chose, to throw their vote to someone who has long since proven himself to be a confused and chaotic man.
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