Fed Feuds Make Headlines, but Debt Makes the Rules

Guest Post by Peter Reagan

Trump vs. the Fed makes for great theater. But while the media fixates on name-calling and accusations, the real story is fiscal dominance. The runaway national debt dictates monetary policy right now – here’s how it shapes your savings…

We live in an age of distractability. Every second that you’re awake of every day of the week, we are surrounded by, submerged in a constant never-ending barrage of information, marketing, and viewpoints.

It can lead to overwhelm if you’re not careful.

And make no mistake, this digital overwhelm is one of the biggest problems in the modern world.

Why?

Because it can be so easy to get sucked into the viewpoint being fed to us without considering if that viewpoint is right or not. Which brings to mind the current situation between the executive branch and the central bank…

High drama at the Federal Reserve

You likely are familiar with the ongoing feud between Donald Trump and Federal Reserve chair Jerome Powell.

Trump has repeatedly expressed frustration with Powell because the Fed hasn’t dropped interest rates. In Trump’s typical, bombastic style, he called Powell “a major loser” and “Mr. Too Late.”

But the controversy doesn’t stop with Powell.

That latest person at the Fed that Trump is going after is Fed board of governors member Lisa D. Cook who he fired over allegations of illegal activities. What criminal activities? Ian Stark and Darryl Coote with UPI tell us about U.S. Director of Federal Housing William Pulte’s accusation:

Pulte had sent the first criminal referral to Attorney General Pam Bondi on Aug. 26, accusing Cook, the first Black woman to sit on the independent board, of falsifying documents and committing mortgage, bank and wire fraud. She is accused of signing two separate mortgage documents for two separate properties that claim each is her primary residence. One property is in Michigan and the other is in Atlanta. The two documents were allegedly signed two weeks apart during the summer of 2021.

The new referral is about a third property in Cambridge, Mass.

It’s high stakes drama with court room elements (there is a court case going on because Trump fired Cook). It has rhetoric and back and forth comments as good as any soap opera, and, of course, Trump even was able to revive his famous line from his reality TV show: “You’re fired!”

It’s enough to suck you in and keep your attention to the exclusion of anything else.

Which is a problem.

Why? Because people think that they’re informed because they know about Trump’s feuds with the chair and a governor of the Fed. As Jeffrey Tucker, commenting for The Epoch Times, writes:

President Donald Trump has fired Lisa D. Cook from the board of governors of the Federal Reserve. Not a soul in the know believes that this one step is fundamentally disruptive to Fed policy or monetary stability or will have any meaningful impact on anything at all. 

In other words, it’s the news equivalent of eating potato chips: Empty calories giving the illusion of substance but without filling you up or really helping in any way.

But, then, there’s the kicker:

And yet, within minutes after the letter came, it was the above-the-fold in every major news source in the world.

Very few people are asking why this is all over the news, but they should.

Why is this headline news?

Tucker argues that the Trump-Cook conflict deserves this coverage because, “Because Trump is the first president since the Fed’s founding who has dared to fire a governor of the Fed. The first ever. He is testing the system.”

Maybe Tucker is right that this unprecedented move by Trump makes this newsworthy because people are concerned that Trump is trying to politicize the Fed.

Certainly, in an ideal world, the central bank of a country (if we have to have one at all) should be politically neutral. It should be working for the people and not for any politician’s or bureaucrat’s desired political ends.

But here’s the thing: Monetary policy should not be a political issue.

Sure, the schoolyard fight is entertaining. But it’s a distraction…

There’s a much the bigger story we cannot overlook

There is a much bigger story going on. Sure, it’s not as dramatic. It doesn’t have the flair of schoolyard taunts or lawsuits or public terminations.

But it has much more real-world impact on you and me. Veronique de Rugy with Newsmax explains:

Concerns about the Federal Reserve’s independence have grown following repeated attacks by President Donald Trump, including this week’s decision to fire Fed Gov. Lisa Cook based on questionable allegations.

But this debate is too narrowly focused on the president’s political pressure, ignoring a growing danger in our system.

It’s true that since the Treasury-Federal Reserve Accord of 1951, the Fed has had operational independence – the ability to set interest rates day-to-day – without any obligation to make government borrowing cheap.

But it never had true economic independence because the bank’s monetary policy cannot be insulated from the effect of fiscal policy, and vice versa.

As public debt grows, the link becomes more visible and fiscal dominance – which occurs when a central bank like the Fed becomes subordinate to the government’s fiscal policy – looms larger.

Put simply, no matter what Trump does, no matter what Powell and other bureaucrats at the Fed do, adjusting interest rates is going to simply be trying to put a bandaid on gunshot wound. What we need is a trip to the ER and emergency surgery to keep the patient alive.

The Fed will continue to try to control inflation without tanking the economy by manipulating interest rates.

Trump wants interest rates lowered to get the economy growing… but lowered interest rates lead to inflation.

Both solutions are just bandaids. Because the real solution is to reign in the Federal government’s absurd amount of deficit spending and to pay down the Federal debt. But those are politically unpopular moves. Nobody wins elections by promising to spend less money. If getting deficit spending under control was easy, we already would’ve done it!

That’s why it’s important to look past the headlines, to get to the root of the challenge. Then you can really understand what’s at stake.

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