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.

From The Daily Economy:

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.

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.

Trump and Powell are no buddies. They’ve been fighting over rate cuts all year—Trump demanding more, Powell holding back. Even after cutting twice, Trump called him “grossly incompetent” and said he’d “love to fire” him. The tension has been building for months.

And Trump now seems ready to install someone who shares his appetite for lower rates and easier money.

Trump has been dropping hints for weeks—saying on November 18, “I think I already know my choice,” and then doubling down last Sunday aboard Air Force One with, “I know who I am going to pick… we’ll be announcing it.”

He was referring to one Kevin Hassett, who—according to a recent Bloomberg report—has emerged as the overwhelming favorite to become the next Fed chair.

Here we sit — investors, analysts, retirees, accountants, even a few masochistic economists — gathered beneath the leafless monetary tree, rehearsing our lines as we wait for Jerome Powell to step onstage and tell us what the future means.

Spoiler: he can’t. But that does not stop us from waiting.

Tomorrow, he is expected to deliver the December rate cut. Polymarket odds sit at 96% for a dainty 25-point cut.

Trump, Navarro and Lutnick pine for 50 points.

And somewhere in the wings smiles Kevin Hassett — at 74% odds this morning, the presumed Powell successor — watching the last few snowflakes fall before his cue arrives.

With U.S. stocks trading at about 24 times forward earnings, plans for capital growth have to go off without a hitch. Given the billions of dollars in commitments by AI companies, financing to the hilt on debt, the most realistic outcome is a hitch.

On a valuation basis, global markets will likely show better returns than U.S. stocks in 2026.

America leads the world in innovation. A U.S. tech stock will naturally fetch a higher price than, say, a German brewery. But value matters, too.

As copper flowed into the United States, LME inventories thinned and backwardation steepened. Higher U.S. pricing, tariff protection, and lower political risk made American warehouses the most attractive destination for metal. Each new shipment strengthened the spread.

The arbitrage, once triggered, became self-reinforcing. Traders were not participating in theory; they were responding to the physical incentives in front of them.

The United States had quietly become the marginal buyer of the world’s most important industrial metal. China, long the gravitational center of global copper demand, found itself on the outside.