This year is shaping up to be a very close contest. Most of the people I talk with are already wishing it was over, and we still have months and months to go. It is entirely possible this one could even stretch into next year.
On one side of the contest, you have the long-term employer. On the other side you have the challenged employee.
Congress created the Federal Reserve 111 years ago and gave it just two jobs. First, the Fed is to maintain price stability. Second, the Fed is to maintain maximum sustainable employment. To the best of my knowledge, Congress does not assign itself such a clearly defined mission.
In addition to creating the laws under which we all must live, one of Congress’ primary passions turns out to be spending money. As luck would have it, there is no easier way to encourage citizens to vote for you than by showering them with government benefits. When conducted on an individual basis this is considered bribery but done on a large enough scale it is simply considered good politics.
Congress controls our country’s fiscal policy – how much we are assessed in taxes and how much the federal government spends. This fiscal policy has a direct impact on our economy. When Congress taxes it siphons money out of the private economy and slows economic growth. When Congress spends it pours money into the private economy and encourages economic activity.
Over the last twelve months, Congress spent $1,700,000,000,000 more than it received in tax revenue, opting to borrow the money rather than raise taxes. This leveraged spending creates economic fuel to increase inflation and reduce unemployment.
The Federal Reserve is employed by Congress to manage monetary policy – setting interest rates and other policies to fulfill its dual mandate of price stability and maximum sustainable employment.
The Fed has been struggling with price stability for the last three years. One could argue they were a victim of unprecedented circumstances when our political leaders chose to turn our economy off during the COVID pandemic in 2020. Both Congress and the Fed flooded the economy with the fuel of free money to restart the engine.
In perfect hindsight, there was too much fuel. The Fed’s assessment was that this fuel would burn off quickly and the massive post-COVID inflation spike would be transitory. That was an incorrect assessment, and they have been trying to regain price stability ever since by raising interest rates and systematically redeeming bonds and mortgages they purchased during the COVID crisis.
These steps successfully brought the inflation rate down initially, but progress has stalled over the last six months. The Fed has self-defined “price stability” as an annual inflation rate around 2%, and freely admits that they have not fulfilled this portion of their job at this point.
Unlike the relatively insignificant political elections that will be held this fall, the real economic contest this year is between Congress and the Fed.
Will Congress’ persistence in showering the economy with borrowed money keep inflation higher? Or will the Federal Reserve’s efforts to rein in inflation with higher interest rates succeed?
In the long-term, the Federal Reserve is likely to win. However, its job would be much easier in the short-term if its employer would stop fanning the flames of inflation.
Quote of the week: Milton Friedman: “One of the greatest mistakes is to judge policies and programs by their intentions rather than their real results.”
Photo Credit: iStock 1214954944 | Credit: photovs
