President Trump would have you think that the surge in economic activity in recent years resulted from his policies. Indeed, throughout his campaign efforts for the 2016 election, the former reality-TV star blasted the Obama administration for economic ineffectiveness. He also took pot shots at the Federal Reserve, claiming that they were causing untenable damage to monetary stability.
But the reality is that the “paper” prosperity we enjoy is mostly due to the Federal Reserve. Had the central bank decided to get serious about sound monetary principles, we’d be in a recession right now. However, it would be a “good” recession in that we would be eliminating the poison of financial engineering; essentially, the high-level circumstance of robbing Peter to pay Paul.
Let’s face facts, though: the American people are too weak to absorb such necessary pain. Sound central banking would require across-the-board sacrifices. In an indulgent nation such as this, the idea is almost sacrilegious.
So the Federal Reserve keeps plugging away, throwing whatever tools they have to keep core metrics like interest rate at desired levels. The problem, though, is that financial engineering isn’t an exact science. And the Fed is now at a point where they may have lost control of their artificially created environment.
The Federal Reserve Caught in an Awkward Position
In all fairness, the Fed never intended to keep the printing presses running indefinitely following the 2008 crash. At the end of the day, central bankers – despite some accusations to the contrary – are human beings. They have lucrative jobs they’d like to maintain and killing the economy doesn’t run high on their priorities.
But in peeling back quantitative easing and thereby raising borrowing costs, they may have overestimated the economy’s strength. Their concern now is to find some way to achieve a better balance without introducing entropy to the system. However, the Trump administration is browbeating the Federal Reserve into lowering benchmark interest rates.
Technically, the Fed operates independently of the White House. They focus on economic realities. But in this case, those economic realities have worsened. Part of the reason of course is Trump’s aggressive stance on foreign policy, especially with the trade war.
No matter what, then, the Fed must do something. The latest announcement that they’ll hold the ship steady came with a slight concession: they’ll cut interest rates if economic risks mount and inflation rates remain below target.
In other words, the Federal Reserve has lost control of the narrative. And that sets an interesting pathway as we head toward the final half of 2019.