The Federal Reserve’s recent actions have the attention of economists and market analysts alike. They are particularly worried about what its monetary policy might mean. When the Federal Open Market Committee (FOMC) released its statement following last week’s meeting, there was plenty for policy wonks to chew on. Remarkably, economist and commentator Jacob Maharrey reads the language as a quiet move toward quantitative easing, even though it’s not referred to by name.
As Maharrey notes, here’s the official language from the FOMC statement that shows a new, though still limited, thoughtful approach to monetary policy. For one, he acknowledges that reserve balances have come down to “ample” levels, providing a context in which changes are appropriate. The committee previewed its intention to purchase shorter-term Treasury securities as needed. This is a strong indication that they are prepared, if needed, to provide liquidity to the markets.
Economic Context and Market Reactions
Unsurprisingly, with the changing economic winds blowing and uncertainty in the air, silver prices have surged to record heights, trading above $66 an ounce. This recent spike has attracted international attention, not least because it reflects overall investor sentiment towards inflation and currency stability. Maharrey makes the case that these market movements are the result of what he calls “open-mouth operations.” This phrase refers to central bankers’ rhetoric aimed at steering expectations and influencing market behavior.
Maharrey pointed to recent comments from Jerome Powell, the Chair of the Federal Reserve. He called last December’s interest rate cut a “close call.” This announcement came on the heels of three dissenting votes in the FOMC. Maharrey is the first to admit that such a scenario is very unlikely, occurring only three times since 2019. The inclusion of minority opinions among committee members highlights the conflicts and challenges facing today’s monetary policy choices.
Debt Dynamics and Policy Implications
Additionally, Maharrey places those costly policy changes within the bigger-picture context of national debt – now over $38 trillion and climbing. He posits that the economy is too weak to support any raise in interest rates for any significant length of time. Politically and financially untenable situations may emerge well below the level at which borrowing costs climb too high. This dual threat puts policymakers in a hard position to thread the needle between fighting inflation and addressing the federal government’s massive debt burden.
Maharrey shines light on some important wisdom from economic historian Tom Woods. He makes a huge case that understanding the effects of monetary policy requires more than reporting on each new Consumer Price Index (CPI) report. Instead, he argues that bigger trends and patterns need to guide policymakers and wonks. He references a 2004 paper by economists Andrew Atkeson and Patrick J. Kehoe, titled “Deflation and Depression: Is There an Empirical Link?” We hope this work gives an academic grounding to making sense of those peculiar historical relationships that often exist between monetary policy and economic outcomes.
The Fed’s Dilemma: A Choice Between Two Bad Outcomes
Maharrey frames the Federal Reserve’s current conundrum as a no-win situation. Keeping interest rates high could be crucial to quelling inflation but threatens to break apart an already debt-laden economy. In this context, cutting rates expands government-run liquidity facilities, stabilizing the financial system. It might result in more inflation than we’d like.
Maharrey argues that the “hawkish” label attached to Powell’s commentary stems from attempts to project a tough stance on inflation. He argues that such rhetoric might be hiding more general worries about macroeconomic stability and debt sustainability. Central bankers are facing multifaceted existential crises at the moment. Together, their decisions will undeniably up-end financial markets and will determine the sort of economy our children will inherit.