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On Powell’s Plate

Summary:
By: Robert Aro This Wednesday concludes September’s Federal Open Market Committee (FOMC) meeting. It couldn’t come at a more tremulous time for Chair Powell and the Board of Governors. As of Monday, the Dow saw massive sell off, news headlines over China’s Evergrande facing bankruptcy continued, DC is facing another debt ceiling debate and COVID continues to dominate. As for the Fed, they too have been coming under scrutiny. A CNBC headline reads: After years of being ‘squeaky clean,’ the Federal Reserve is surrounded by controversy. And another titled: Fed Chief Powell, other officials owned securities central bank bought during Covid pandemic. Those were last week’s headlines as the story only recently broke. To their credit, CNBC is asking novel questions like: Should the Fed

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By: Robert Aro

This Wednesday concludes September’s Federal Open Market Committee (FOMC) meeting. It couldn’t come at a more tremulous time for Chair Powell and the Board of Governors. As of Monday, the Dow saw massive sell off, news headlines over China’s Evergrande facing bankruptcy continued, DC is facing another debt ceiling debate and COVID continues to dominate. As for the Fed, they too have been coming under scrutiny. A CNBC headline reads:

After years of being ‘squeaky clean,’ the Federal Reserve is surrounded by controversy.

And another titled:

Fed Chief Powell, other officials owned securities central bank bought during Covid pandemic.

Those were last week’s headlines as the story only recently broke. To their credit, CNBC is asking novel questions like:

Should the Fed have banned officials from holding, buying and selling the same assets the Fed itself was buying last year when it dramatically widened the types of assets it would purchase in response to the pandemic?

The security trading involved key members, such as Powell, who held municipal bonds from around $1.25 to $2.5 million. Other Fed Presidents were also named in the press. Perhaps top ranking decision members at the Fed should not be able to own the same securities they were buying through America’s central bank? It would at least remove the optics of having a conflict of interest or acting in a way that is against the public’s interest.

To be clear, as far as the public is aware, no member of the Fed violated any laws. But one should always remember there is a difference between law and ethics.

Adding to Chair Powell’s agenda is what appears to be a growing divide amongst the Board of Governors over the timing of the Fed’s tapering strategy. Per CNBC:

By Goldman Sachs’ count, six officials who have spoken publicly on the issue of tapering asset purchases are for it and six are against.

Having a split board on something as large as asset purchases doesn’t make his job any easier. The voting results and minutes will reveal if they managed to work out their differences during their closed door meetings this week. And what of inflation? Do they still believe we’re living in a transitory period?

With uncertainty over Powell’s term as chair, which expires in a few months, the last quarter of 2021 promises to make for interesting news stories. As to what Biden might do, a former chief economist of the National Economic Council provided a solution:

The administration is understandably going to wait and see how the Fed handles the taper and what the markets do. That could be the determining factor in whether he’s reappointed.

An interesting feature of the Fed becomes captured: For the entity entrusted to manage the nation’s unemployment and rate of inflation, it seems we’re always concerned as to how the market, namely stock, bond and real-estate reacts to every move the Fed makes. While not in their job description, the Fed has, for a very long time, been the de facto market savior.

Should Biden, or his advisors, use market performance to judge the merits of Powell’s tenure, as the article suggests, then Powell would be confronted with another moral dilemma. Trading securities as Fed chair has already pushed ethical boundaries. But having one’s job security tied to stock market performance, when you have legal authority to increase the money supply at will, creates another set of challenges. One can only hope those in charge use more than the market’s response as a barometer of Powell’s achievement… but it must be reiterated: one can only hope.

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Mises Institute
The Mises Institute, founded in 1982, teaches the scholarship of Austrian economics, freedom, and peace. The liberal intellectual tradition of Ludwig von Mises (1881-1973) and Murray N. Rothbard (1926-1995) guides us. Accordingly, we seek a profound and radical shift in the intellectual climate: away from statism and toward a private property order.

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