Halver’s column: The Fed on the way to omnipotence?

Despite good news about a corona vaccine, the winter in America will be “very dark” in terms of health and economy, according to Joe Biden. The Fed is therefore begging to pay for new government stimulus packages. But while financial policy could not get enough of the free beer of monetary policy in the past, it is currently not very thirsty for domestic political reasons. How is the mood supposed to arise in the “economy”?

The Fed has verbally pressed the economic panic button. Should the economic recovery slow down, asset prices could suffer a severe setback, which will put additional psychological strain on the economy. It would also be detrimental to the economy if advances in virus containment were delayed or the distribution of a successful vaccine stalled. In any case, given the high level of debt in sectors such as energy, commercial real estate, tourism and hospitality, the risks are sometimes as high as they were at the time of the financial crisis in 2008.

This deliberate minor stance aims at the financial policy to finally administer new economic stimuli. But even during the election campaign, both political sides could not bring themselves to new sprinklers. And now after Trump’s painful loss of the election, the Republicans are unlikely to help the Democrats achieve their first economic success with a huge aid package. Until the end of the Trump era, “the sea rests quietly”.

After his inauguration on January 20, 2021, the new US President Biden would love to launch a multi-billion dollar stimulus package that does not need to shy away from comparison with President Franklin D. Roosevelt’s New Deal in the 1930s. The House of Representatives, which is still in democratic hands, is already shouting “There must be more of everything”. But what about the co-determining Senate? We’ll have to wait until the runoff election on January 5th in the state of Georgia. Then two Senate seats will be allocated there. If these go to the Democrats, there would only be a stalemate between the two parties of 50:50. But then US Vice President Kamala Harris would have the decisive vote, which would turn the scales towards the Democrats. But nothing has been decided yet. Because even if the Democrats rule all instances, that does not necessarily mean that economic issues can be governed easily. The following applies: the greater the electoral success of a party, the less you have to discipline yourself, the less the corps spirit is pronounced.

So far, the Fed has only been able to pull the rope, it cannot push it

Alternatively, the US Federal Reserve could buy up more government bonds or mortgage-backed bonds in order to make their interest rates even more economic-friendly. And it could just as well drown companies in loan offers by buying their bonds at large volumes. Or it further liberalizes the credit restrictions for medium-sized and small companies. But why should companies borrow or invest in liquidity with the lowest interest rates if economic returns are uncertain? Why drink if financial policy doesn’t make you thirsty?

But America would not be America if the economic policy discussion did not develop further on this issue as well. The USA is pragmatic like craftsmen who have measured incorrectly and therefore behave according to the motto “What does not fit is made to fit”.

In order to really make the Fed the patron saint of the US economy, calls have already been made that Congress should give it its own instrument to combat recession. In this way, she can intervene immediately in an economic emergency without political friction losses. The US Federal Reserve chief would become a father in a hurry, so to speak.

Specifically, it should have a payout volume of at least one percent of American economic output. The payout button would be pressed if inflation and / or unemployment fell below or above certain levels. In today’s age of digitization, these funds would then be stored in the apps of households and companies in no time at all, like when “beaming” on the Enterprise spacecraft. And so that this money can be used quickly for consumption or investment, its validity could also be limited in time like vouchers.

The Fed as a full-service provider for the economy

This would also give a boost to re-inflation, which is also urgently needed. Because the money that the Fed spends is more new American debt. How else can you escape the latest debt court if America’s debts are not inflated away?

And on this front too, the Fed is showing charity. By buying up government bonds, it initially counteracts sustainable increases in yields.

At the same time, the cyclical bond purchases are driving inflation expectations upwards.

Both effects together should ultimately bring the desired result: After inflation, the interest on debt will move into negative territory and keep it there. Then the big debt-eating succeeds.

The US Federal Reserve as an always available fire department

With the abolition of the separation between independent monetary policy as a brake on a financial policy without stability because it is too spending-friendly, the Rubicon would be crossed. Because the economy is always on fire somewhere and somewhere, right? Wouldn’t every US president always put the person at the head of the Fire Extinguish Department (FED for short) who, as the responsible fire chief, classifies a matchbox as a fire risk and has to be put out preventively? It would certainly not hurt his re-election.

In the end, America is all about economic growth. In any case, politicians are more afraid of nothing than people with no prospects who make the street uncontrollable. In the war against economic risks, unorthodox, including monetary policy, instruments cannot be ruled out. Given the continued “secularization” of the Fed over the past few decades, it is difficult to disagree. Last but not least, the average American is interested in stability criteria of the Germanic kind as the vegans are interested in Mettbrötchen.

We will watch the Fed continue to grow in power. In the meantime, at least it is already omnipotent in the financial markets.

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