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Daily Missive

Why Fed Reform Could Be the Biggest Sleeper Issue of 2024

Loading ...Addison Wiggin

October 28, 2024 • 3 minute, 40 second read


Why Fed Reform Could Be the Biggest Sleeper Issue of 2024

From The Daily Economy:

 

Joseph Sternberg, author of the “Political Economics” column at the Wall Street Journal, has been on the Federal Reserve’s case recently. He continues to take central bankers to task in his latest article. “The next president will inherit a Federal Reserve staffed by economists — and their intellectual helpmates in academia — who still don’t fully understand what has happened over the past few years, let alone over the past few decades,” Sternberg warns. He’s right. Fed officials admit to only limited and contingent culpability for high inflation in recent years.

The Fed is a flawed institution at best, and a failed institution at worst. Sternberg suggests several reforms. While potentially helpful, none go far enough.

First, Sternberg castigates the fashionable yet unfounded belief amongst policy economists that “Mr. Trump’s economic agenda of tariffs and tax cuts would be inflationary.” Sternberg is right to call out this nonsense.

Tariffs would make specific goods and services more expensive. This is a relative price effect. It only shows up in the general price level if it affects enough prices to drive up the index—and even then it doesn’t really qualify as inflation, because it’s a one-time transition to a higher price level. Inflation means a higher growth rate for the price level.

Tax cuts aren’t inflationary, either. If anything, by incentivizing additional savings and investment, tax cuts may result in a small productivity boost, and hence mild disinflation. The crude Keynesianism Sternberg calls out, despite its consistent record of failed predictions going back more than 70 years, is still alive and well amongst economists who see themselves as efficiency engineers first and social scientists second. We can safely ignore them.

Next, Sternberg laments Fed decision-makers’ “groupthink,” explained in part by the concentration of authority in the “Washington-based Board of Governors in thrall to the central bank’s research department.” The “Fed’s independence from the rest of the government” amplifies its irresponsibility. It “means politicians and voters can’t enforce accountability.” Sternberg correctly highlights the Fed’s adoption of flexible average inflation targeting (FAIT) in August 2020 as an example of deep institutional flaws. The Fed is picking its own goals and deciding whether or not it has achieved them. In other words, it’s a judge in its own cause. That’s unacceptable for anyone who cares about the rule of law.

How to fix this? Sternberg suggests changing how the Fed makes decisions, so that regional Fed branches have more input. He also wants Congress to keep a closer eye on monetary policymakers. These are probably good ideas. At the margin, they would help. But we can and should do more.

Here are a few harder-hitting ideas for Fed reform:

  • Get rid of the dual mandate. It’s redundant. The Fed’s monetary policy activities should solely focus on price stability.
  • Pare back the Fed’s regulatory powers radically. The Fed should ensure banks are adequately capitalized against short-term liabilities. That’s it.
  • End further credit allocation. Close the discount window.
  • Shrink the balance sheet. Return to a “Treasuries only” policy for open market operations.
  • Stop paying interest on reserves. Ditch the floor system and return to the corridor system.

For even more radical (and effective) reforms, consider the following, in ascending order of implausibility:

  • Compel the Fed to stabilize the dollar, or current-dollar GDP, or a related nominal anchor. If central bankers fail, they get fired.
  • Eliminate the FOMC. Automatically grow the monetary base by a set percentage each year. Long live Milton Friedman!
  • Freeze the monetary base. Outsource monetary policy to the market. From now on, financial intermediation (banking) is the sole means by which the money supply changes. The only requirement is banks must redeem their liabilities for fiat dollars, the stock of which is now fixed.
  • Revive commodity money. The gold standard is massively underrated. It’s not as attractive an option if the US is the only economy on gold. But it’s still worth a look.

“Fed reform could be the nerdiest sleeper issue of this campaign season,” Sternberg concludes.

I can only wish. Americans are hopping mad about dollar depreciation. But even with 9-percent consumer price inflation during 2022, Congress never seriously considered changing how the Fed works. Nevertheless, it should. I hope Sternberg is right about citizens’ appetite for reining in the central bank – the hungrier, and nerdier, the better.


Dave Hebert: How Long Could That $1.8 Billion Powerball Jackpot Fund the Government?

September 16, 2025 • Addison Wiggin

Our fiscal reality is clearly unsustainable. With the passage of the “Big Beautiful” budget reconciliation bill, Congress has already given itself permission to grow the national debt to $41 trillion. Interest payments on the national debt are already the second-most-expensive item on the federal budget, behind only Social Security (and ahead of defense spending). As the national debt continues to grow, debt service will become our number one spending obligation. History suggests it’s only a matter of time until we hit that limit and, unless things change, once again raise the debt ceiling. This cannot continue indefinitely.

Dave Hebert: How Long Could That $1.8 Billion Powerball Jackpot Fund the Government?
When Trust Runs Thin, Markets… Rally?

September 16, 2025 • Addison Wiggin

Bloomberg’s September survey of economists found that the majority are “somewhat or extremely worried” that the Fed’s decisions will be influenced by political loyalties.

If that happens, borrowing costs for the U.S. government rise as risk premia creep into Treasury markets.

Public confidence is already threadbare.

In 2001, 74% of Americans trusted Alan Greenspan to do the right thing. In 2025, only 37% say the same of Jerome Powell. For the first time, trust in Trump to manage the economy is higher than trust in the Fed chair.

When Trust Runs Thin, Markets… Rally?
The Tech Meltup, Exhibit A

September 16, 2025 • Addison Wiggin

Overall, the S&P 500’s RSI hit 70, the low side of overbought territory — for the entire index.

“Fed rate cuts tomorrow are likely priced in,” writes portfolio director, Andrew Packer, “it may not trigger a selloff, but at these levels,  investors may be disappointed with a .25 cut.”

Tech investors will remain bullish on the prospect of multiple rate cuts over the next few meetings.

But be wary of any indication the Fed tries to rebuff Trump’s overtures and, God forbid, remain independent tomorrow.

The Tech Meltup, Exhibit A
Plowshares into Swords

September 15, 2025 • Bill Bonner

The empire is in decline. Demographics, regulatory tightening, fake money and the mis-allocation of trillions of dollars (much of it on pointless wars) have sapped the vitality of the economy. The Federal government gets bigger and bigger, but there is no longer enough output to pay for it.

The interest on the debt alone takes more more than a trillion dollars a year. The US faces a financial crisis. And for the first time in history, our children face a poorer future.

The welfare state model no longer works; the center — consensual democracy — wobbles towards the extremes. What to do? Beat our plowshares into swords?

Plowshares into Swords