The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

No, Not the Fed Too ??

08/31/2020

It has been widely-reported that the U.S. Department of Justice has been overly-politicized, and that report is now widely accepted.

It has been widely-reported that the U.S. Center for Disease Control (CDC) and the Federal Drug Administration (FDA), two of the most respected institutions in the world, are being overly-politicized, which might explain why they started withholding demographic data on the coronavirus.  What are the odds a vaccine will be announced prior to the election, and then . . . who will believe it?

It has been recently reported that the Federal Reserve is also being politicized.  Sadly, no Chairman of the Fed has ever been as harshly criticized by any President as the current one.  As a result of the criticism, we had three rate cuts last year, when we didn’t need it.  However, when the economy collapsed in March, both the Fed and the Congress answered the call and did the right thing.  The Fed immediately starting pumping up the money supply by well over 20%.  However, the President, who  famously watches the stock market closely, wanted a new record high.  For weeks, it churned slightly below that level.  It just needed a boost, which the Fed provided.

Last week, the Fed announced that the 2% inflation goal was no longer a limitation and that the Fed would not try to curb potential inflation any time soon.  What the stock market actually heard was “another increase in the money supply to increase price inflation.”  The stock market promptly broke thru and set a new record.  (Excess money supply is “soaked-up” by asset values, including stock prices.)  Mission accomplished!

The reason this looks politically-driven is that the announcement means nothing.  It is not news.  It was not a necessary announcement.  It was just a signal to Wall Street that the Fed was not going to stop spiking the punch bowl.  In fact, a little more spiking and a little less punch . . .

It is not normal to have a “favorite” government agency, I guess, but I’ve always admired the quiet nerds at the Fed, who think about the third and fourth derivatives of economic decisions.  I hope they don’t get “slimed” too badly!

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