The Wells Fargo bank account scandal took center stage in the news last week and in all likelihood will continue to make headlines for many weeks to come. What Wells Fargo employees did in opening bank accounts without customers’ authorization was obviously wrong, but in true Washington fashion the scandal is being used to deflect attention away from larger, more enduring, and more important scandals.
What Wells Fargo employees who opened these accounts engaged in was nothing more than fraud and theft, and they should be punished accordingly. But how much larger is the fraud perpetrated by the Federal Reserve System and why does the Fed continue to go unpunished? For over 100 years the Federal Reserve System has been devaluing the dollar, siphoning money from the wallets of savers into the pockets of debtors. Where is the outrage? Where are the hearings? Why isn’t Congress up in arms about the Fed’s malfeasance? It reminds me of the story of the pirate confronting Alexander the Great. When accused by Alexander of piracy, he replies “Because I do it with a small boat, I am called a pirate and a thief. You, with a great navy, molest the world and are called an emperor.”
Over two thousand years later, not much has changed. Wells Fargo will face more scrutiny and perhaps more punishment. There will undoubtedly be more calls for stricter regulation, notwithstanding the fact that regulators failed to detect this fraud, just as they have failed to detect every fraud and financial crisis in history. And who will suffer? Why, the average account-holder of course.
45 years ago today, on August 15, 1971, President Richard Nixon officially closed the gold window. While US citizens had been forbidden from owning gold or from redeeming their gold certificates for gold coins since the early 1930s, foreign governments still had the privilege of redeeming their dollars for gold. Due to the Federal Reserve’s inflationary monetary policy during the 1960s, foreign governments began to redeem more and more dollars for gold. Attempts to encourage other governments (especially France) not to redeem their dollar holdings were unsuccessful, and there was a very real threat that US gold holdings might eventually be exhausted. So President Nixon decided to close the gold window, thus severing the final link between the US dollar and gold. The removal of the restraint of gold redemption freed the Federal Reserve to engage in more inflationary monetary policy than ever. The effects of that on money supply and official price inflation figures are readily apparent.
Consumer Price Index
M2 Money Supply
The demonetization of silver in the Coinage Act of 1873 was widely assailed by its critics as the “Crime of ’73.” Isn’t it about time that Nixon’s closing of the gold window be known as the Crime of ’71?
Unsurprisingly, the Federal Open Market Committee (FOMC) decided today once again to hold the target federal funds rate at 1/4 to 1/2 percent. Kansas City Fed President Esther George was the sole dissenting vote in this month’s FOMC statement, preferring that the target federal funds rate be raised to 1/2 to 3/4 percent. Pointing to some of the rosier economic data that has come out recently, the FOMC adopted a slightly more upbeat stance in its statement. According to the FOMC, the labor market has strengthened, labor utilization has increased, and household spending has been growing strongly.
One curious statement added in this month’s statement is that “Near-term risks to the economic outlook have diminished.” This is probably a reflection of a belief that market risks from China, from the Eurozone, or within the United States have largely blown over. This seems overly optimistic. While August will likely be slow with so many people taking vacation, September has a history of being an unruly month and the next two to three months are definitely within the “near-term.” Has the Fed forgotten the roller coaster that was September 2008? China is a powder keg waiting for a spark, the Eurozone is facing another crisis in the Italian banking system, and the United States has seen bouts of “good” economic data followed up the next month by bad economic data. Whether the economy will boom or bust over the next three months is still up in the air.
Given the Presidential election coming up in November, it would be highly unlikely for the Fed to raise the target federal funds rate until after the election. The Fed wants to make the economy look as good as possible before the election, and raising rates risks slowing things down and increasing pessimism among voters. That would play into Donald Trump’s hand, so we would not be surprised if President Obama has told Chairman Yellen to do whatever she can to ensure a rosy outlook in November.
The Federal Open Market Committee (FOMC) decided today to leave the target federal funds rate at between 0.25 and 0.50 percent. This was widely expected, given the dismal jobs report that was published two weeks ago and the uncertainty in the banking sector surrounding the UK’s upcoming Brexit vote. Some FOMC participants had in recent weeks expressed uncertainty about raising rates because of the potential for instability in the banking sector if the UK votes to leave the European Union.
Language in this month’s FOMC statement was largely unchanged from April. The main changes in emphasis were that the FOMC appears to be more downbeat about job gains, stating that the “pace of improvement in the labor market has slowed”, although the Committee continues to believe that “labor market indicators will strengthen.” Additionally, the Committee claimed that household spending has strengthened, but it flagged business fixed investment as soft. References to strong job gains from the April statement were removed in the June statement. The FOMC still maintains that inflation is running below its 2 percent target and points to most measures of inflation expectations remaining little changed. Perhaps surprisingly, there was no mention of specific international factors such as Brexit that might factor into decision-making, only the same “the Committee continues to closely monitor inflation indicators and global economic and financial developments.”
Today’s decision was passed unanimously. Kansas City Fed President Esther George, who dissented from the previous statement and favored a rate hike in April, voted in support of this month’s FOMC policy decision.
Since markets were largely expecting rates to remain steady, we expect no major ramifications from this announcement. More interesting to markets will be the Bank of England’s monetary policy announcement tomorrow, coming one week before the Brexit vote. The ECB has already vowed to support the banking sector in the event that the UK leaves the EU, so it will be interesting to see if the Bank of England makes the same promise to UK banks.
Finally, Fed Chairman Janet Yellen testifies before the Senate and the House of Representatives next week as part of her semiannual Humphrey-Hawkins testimony. Summer testimony has normally been held in July, so these earlier testimony dates are undoubtedly an attempt to provide more timely scrutiny of today’s FOMC decision.
After May’s dismal jobs report, the odds of the Federal Reserve raising the target federal funds rate anytime soon are just about nil. Remember that the Fed has declared itself for the past several years to be “data dependent”, meaning that they are looking for good economic news and data that indicates that the economy has gotten back to normal. And what do they mean by “good news” or “back to normal”? Why, the overheated boom-period growth rates we last saw at the height of the last housing bubble. That is why the Fed will not be raising rates for a long time.
A new ECB white paper has found evidence that many major market-moving data releases in the US are leaked in advance of their official publication, allowing some investors to profit from trading stocks and Treasury securities when those data are released. Included among the data releases studied are two from the Federal Reserve Board, on industrial production and consumer credit. The researchers analyzed price movements in the S&P 500 futures market and the 10-year Treasury Note futures market in the thirty minutes prior to these data releases, assuming that strong price movements in the direction of the eventual post-release price were indicative of some sort of leak. The industrial production release was one of seven releases that was strongly suspected of being leaked. This isn’t good news for the Fed.
The Fed is already grappling with an ongoing probe into a 2012 leak of confidential interest rate information to a financial newsletter. The Fed also provides news organizations with sensitive data which is embargoed until the Fed publishes it, however those embargoes are occasionally breached. Then there are the accidental leaks from the Fed on FOMC matters and the case of the former New York Fed official who obtained confidential information from his former colleagues after he went to work at Goldman Sachs. There have been enough mistakes and leaks that the idea of sensitive information being systematically leaked to certain market participants isn’t far-fetched. Especially because such leaks rarely come to light and almost never result in anyone’s termination, the risks of being caught don’t outweigh the potential benefits of making friends on Wall Street or making a little extra money. At the very least, this study should result in hard questioning surrounding these data releases and the importance placed on them. In particular, the Federal Reserve’s role as a market mover should face scrutiny. Leaking information to profit special interests is all the more reason to end the existence of government agencies that have so much power to move markets.
Carl Menger Center Executive Director Paul-Martin Foss was interviewed last week by Mike Gleason of the Money Metals Exchange. You can listen to the interview or read the transcript at the Money Metals Exchange.
As expected, the Federal Open Market Committee decided today to maintain its target federal funds rate at between 0.25 and 0.50 percent. Another rate hike is expected at the earliest at the June FOMC meeting, with the August meeting being a more likely candidate for a rate hike. Language in the FOMC statement was largely unchanged, with the exception of noting that economic growth has slowed, the labor market has improved, and household spending has moderated. The FOMC also removed language referring to inflation picking up, which would lead us to believe that they still think the rate of increase in inflation is, in their eyes, sub-optimal or slowing. The FOMC also removed language about global economic developments posing risks, instead stating that the Committee would continue to closely monitor global economic and financial developments. Kansas City Fed President Esther George dissented from the FOMC’s decision yet again, favoring an increase in the target federal funds rate to 0.50 to 0.75 percent. We wouldn’t expect much market reaction to today’s announcement, as it was already expected and should have been priced in. Expect more reaction to the Bank of Japan’s monetary policy announcement tomorrow.
Federal Reserve Board Governor Lael Brainard’s campaign contributions are in the news today, as she recently maxed out her contributions to Hillary Clinton’s presidential campaign. According to CNBC, Brainard is the only Federal Reserve Board Governor since 1990 to donate to a presidential campaign. While it isn’t illegal for Fed Governors to contribute to political campaigns, Fed officials have avoided making such contributions in order to avoid the appearance of impropriety and avoid compromising the Fed’s claims of political independence. The younger generation of officials, however, such as Brainard and newly-appointed Minneapolis Fed President Neel Kashkari, have cut their teeth as political appointees. Both Brainard and Kashkari previously served as political appointees in the Treasury Department. As executive agencies are overtly political, so too are the appointees who serve in them, and they have brought that political attitude with them to the Fed.
While the Fed has always been a tool for the President to enact the monetary policy he wants, Fed officials have always tried to distance themselves publicly from the appearance of acting politically. With Kashkari’s actions in Minneapolis and now Brainard’s campaign contributions coming to light, that public facade of separation of policy and politics that the Fed has tried so hard to maintain is finally starting to crumble. The reality is that Fed officials are not dispassionate, apolitical actors above the fray, seeking only to work in the best interest of the country. They are appointees, and like any other appointees they serve those who appoint them. Once that realization sets in in Washington, perhaps Congress might finally take some steps to enact real oversight over the Federal Reserve.