Federal Reserve Chess
Is Janet Yellen playing politics with the economy? Is she and the Fed, on one side, playing chess with President-elect Trump on the other side with the American people the pawns?
It is no shock that President-elect Trump is no fan of Janet Yellen nor the Dodd-Frank Bill! During the debates, Trump stated that Yellen was doing political things by keeping interest rates low and potentially influencing the election.
The 2008 election results perhaps serves as an important reminder of how economics impacts elections when the stock market began it’s free fall just prior to the November 2008 election.
The Federal Reserve FOMC has since indicated that interest rate hikes are in the near future despite holding off on such increases prior to the 2016 election.
After the election and in light of Trump’s criticisms Janet Yellen indicated that she intended to serve her full-term which ends in 2018 despite Trump’s comments.
The Federal Reserve is misreading the economy in so many ways!
On the one hand, the Federal Reserve is woefully unprepared to acknowledge its role in the financial debacle of the dot.com bubble as well as its role in the 2008 mortgage meltdown in the United States.
Next, the Fed mistakenly believes that the economy is close to full employment despite wages being relatively stagnant.
The unemployment rate in November 2016 is listed as 4.6%. The U-6 unemployment rate however is 9.3% for the same time frame. An even more telling statistic is the labor force participation rate which stands at 62.7% which is a far cry from a full employment level of economic activity.
Concurrently, price and inflation data paints a similarly confusing scenario. The producer price index increased in November 2016 (See Chart 1 – 12 month changes in Producer Prices) however an examination of the prior 12 months shows that with the exception of service prices a deflationary scenario is a reality. The consumer price index however does show an inflation rate hovering at around 2%.
Real disposable income (See Chart 2) shows a different story in that wage earners are at best staying stagnant in real disposable income in this economic recovery.
The Federal Reserve must be extremely careful not to confuse the significance of the price data, deflation trends, volatility, and the lack of economic growth of real disposable income with perceived improvements in employment. The risks of doing so may be fatal to the economy unless the intent is to destabilize the Trump presidency at its inception.
Most significantly, with quantitative easing, the Federal Reserve has provided over $4 trillion of liquidity to the market which is still outstanding. An examination of the Federal Reserve’s balance sheet (See Chart 3) shows $2.4 trillion of treasury securities and over $1.7 trillion in mortgage-backed securities.
Perhaps equally as troubling is that the Federal Reserve’s efforts at quantitative easing have produced little more than low interest rates and have instead potentially paralyzed the United States economy and the world economies going forward due to this unique monetary policy as all nations try to wean themselves from such "free money".
Since quantitative easing started in 2008, the money supply has exploded, the velocity of money has plummeted (See Chart 4), and worldwide interest rates have declined and in some cases gone negative (See Chart 5). These are the economic statistics the Fed must consider.
As the Federal Reserve raises interest rates in December 2016, they would be well advised to remember the ghost of 1937, the four nation results particularly in Europe of the 2012 attempts at raising interest rates which led to economic disaster in Europe, and the anemic results of the efforts to raise interest rates in the United States in December 2015.
The Federal Reserve has attempted to manipulate the economy since its foundation. Dr. Yellen and her predecessor have misguidedly believed that economies can be manipulated successfully.
The failure the Fed to acknowledge its own responsibility in the dot.com and real estate bubbles will lead to a financial debacle of unparalleled consequences as Dr. Yellen does battle with the new administration.
Dr. Yellen has thrown down the gauntlet. The battle though is between the Federal Reserve and its regulated economy versus the Trump free market economy unimpeded by economic growth stifling regulations.
Instead of raising rates, the Federal Reserve would be well advised to pull back on quantitative easing by lowering its exposure to mortgage-backed securities and treasury securities at a rate of $10 billion a month and allow interest rates to establish a market norm rather than try to artificially manipulate rates.
The world’s economies are fragile. The markets need stability. The markets need predictability. The markets need to not be interfered with! The Federal Reserve must establish a long-term publicized program to reduce quantitative easing until it’s eliminated. That is over $4 trillion which must be eliminated!
It took a great deal of time to get us into this financial mess and will take a great deal of time to get out of. Anything short of that will be the equivalent of an economic Armageddon as the forces of regulation do battle with the free market.
The Federal Reserve just does not quite understand yet the free market will always win. The battle however will be ugly and is not needed if the Federal Reserve were to give free market economies a chance.
The battle will be played out with your jobs, your families, your homes, and your future. The Fed must not be run for political gain.
Col. Frank Ryan, CPA, USMCR (Ret) was elected to the PA House of Representatives in 2016 and will be sworn in on January 3, 2017. He has served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at [email protected] and twitter at @fryan1951