Forget the “Dual Mandate,” Here’s Every Fed Chair's Mono-Mandate

Posted by Vident Financial on 11/8/21 12:30 PM

Looking back at economic conditions in October, culminating in a Federal Reserve meeting which announced probable “tapering” but not raising interest rates, three particular points jump out at us.

  1. Fed stuff -- Officially the Fed has two mandates: 1. Create enough money supply to “stimulate” employment. 2. Don’t create so much money supply as to cause high inflation. But unofficially, there has always been only one real mandate for Fed Chairs: 3. Get reappointed. In this environment, that translates into continued easy money, but with some occasional gestures toward monetary discipline. Markets will move in response to alternating hawkish and dovish Fed-speak. Central banks aren’t supposed to be in the news this much. Markets aren’t supposed to move on tiny little cryptic hints and word choices. When an economy is working the way it’s supposed to, Central banks should be neither seen nor heard, but rather function as the unsung plumbing system of the monetary order.

  2. Short-term economics -- COVID and the resulting shutdowns were a pause button on the economy. As such, economic activity was mostly deferred, which is why the economy crashed so hard early last year but bounced back so quickly afterwards. The Delta variant’s effects seem to be the same, but on a smaller scale. COVID Classic created a hard stop for two quarters, and then fast-forwarded activity for the following two quarters, which is why the economy came roaring back. Delta didn’t push a full pause, but it did push the slow-down button in the third quarter. So far, it looks like the fourth quarter is probably back to the play button.

  3. Long term economics -- Washington is determined to keep the emergency spending levels going even after the emergency has ended. This will make it nearly impossible for the Fed to let interest rates return to normal. As Nobel Prize-winning economist Friedrich Hayek said, easy money is like riding a tiger; the most dangerous part of riding a tiger is when you try to get off. Continued spending, borrowing, and central bank enabling is inherently inflationary, and the government spending binge is a misallocation of resources and not conducive to long-term growth. High valuations will make it hard for United States large cap growth stocks to continue their past strong performance.

In summary, recovery is somewhat back on track for the moment due to the temporary fluctuations to the pandemic, but because the central bank is trapped by the appetite of the federal government for spending beyond tax revenues, inflation is not likely to return to low levels over the next few years.

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