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.

Back in the Global Financial Crisis (2008), we recall mass layoffs were driving desperation.

Today, unemployment is relatively low, if climbing.

Affordability is much more of an issue. Food, rent, healthcare, and childcare are all rising faster than wages. Households aren’t jobless; they’re stretched. Job “quits” are at crisis-level lows.

In addition to the top 10% of earners, consumer spending is still strong. Not necessarily because of prosperity, but because households are taking extra shifts, hustling gigs, working late into the night, and using credit cards. The trends hold up demand but hollow out savings.

It’s the quiet form of financial repression. In an era of fiscal dominance, savers see easy returns clipped, workers stretch hours just to stay even, and wealth slips upward into assets while daily life grows harder to afford.

Last month, Nasdaq asked the Securities and Exchange Commission (SEC) for approval to let tokenized stocks and ETFs trade on its main exchange.

If approved, these digital shares would sit side-by-side with traditional equities. Meaning, they would fall under the same U.S. securities laws that govern $50 trillion in annual equity trades.

And this rollout could begin as early as 2026, once the Depository Trust Company — the clearinghouse that settles every U.S. stock trade — updates its systems to handle digital tokens.

If it happens, this won’t be a small tweak to the machinery of finance. It’ll represent the first major step toward moving Wall Street onto blockchain infrastructure.

And we don’t have to imagine what it might look like…

Because it’s already happening.

The launch of ChatGPT in October 2022 ended the pandemic-era bear market in stocks. The AI story has been the predominant narrative for three years now. The indexes on Wall Street are at historic highs, surpassing 2000, 1968, 1929… the last three tech-inspired bubbles.

But ChatGPT did something else. It brought the idea of “productivity gains” back into the economic conversation.

Stablecoins have proceeded rapidly from being a grey zone through which capital would traverse as it moved into or out of the crypto-economy, to becoming an extension, if not a nascent pillar, of the fiat money system itself.

Coinbase Head of Institutional Research David Duong sees the market cap for stables hitting $1/2 trillion by 2028 (which would be somewhere between a 4X and 5X from where we are now).

Demetri Kofinas recently interviewed Charles Calomiris, former Chief Economist at the US Office of the Comptroller of the Currency, and it was eye-opening to hear someone of his stature speak so matter-of-factly about how the structure of the banking system is evolving in realtime.