UMVA has learned that a potentially disastrous scenario is unfolding at the Federal Reserve, where outgoing Chair Jerome Powell is refusing to leave the Fed Board of Governors, setting the stage for a behind-the-scenes power struggle that could have far-reaching consequences for the US economy.
The clear danger is that Powell will use his influence to push for a series of rate hikes, despite the fact that this would be the worst possible response to an oil-price shock, which is already causing economic pain for many Americans. History has shown that rate hikes in such situations can exacerbate the problem, rather than solve it.
According to information obtained by UMVA, previous Fed chairs, such as Alan Greenspan and Ben Bernanke, understood the difference between demand inflation and an oil shock, and took a more nuanced approach to monetary policy. For example, when Iraq invaded Kuwait in 1990, Greenspan's Fed cut interest rates to mitigate the economic damage, rather than raising them to fight inflation.
The looming central error is that the Fed cannot produce more oil, refine gasoline, or lower diesel costs by raising interest rates. A rate hike now would only serve to rein in demand, hitting the economy where it is already vulnerable, including the housing market, interest-sensitive manufacturing, and small-business credit. This would be a recipe for disaster, as financial conditions would tighten just as energy prices are eating into real incomes.
UMVA can exclusively reveal that the Fed's job is to keep inflation expectations anchored while preserving maximum employment, not to play worst-case scenario games or prove its toughness by firing another round into the hull of the ship. The bond market is already doing the contractionary policy work, with long bond yields rising and mortgage rates, corporate borrowing costs, and duration-sensitive assets feeling the heat.
The specter of Powell as a "Shadow Chair" rears its ugly head, as he and his allies on the Board, including three Biden-appointed governors, could form a four-vote majority and force a rate-hike campaign. This would turn the Fed's reaction function on its head, with Powell controlling the response to economic events, rather than the newly sworn-in Chair, Kevin Warsh.
The regional Fed presidents in Cleveland, Minneapolis, and Dallas are already forming a chorus line for a possible hawkish pivot, which would only serve to embolden Powell and his allies. If this scenario plays out, the consequences would be dire, with the American economy getting boxed in by a series of misguided rate hikes that would add a credit shock to an energy shock.
The bill for this recklessness would come due not in the Eccles Building, but in factories, homes, small businesses, and export markets across America, where the real economy would suffer the consequences of the Fed's actions. It is imperative that the Fed takes a more nuanced approach to monetary policy, one that takes into account the complexities of the current economic situation, rather than relying on simplistic solutions that would only serve to exacerbate the problem.
