The Federal Reserve Has a Credibility Problem

NYMag: Washington, D.C., Has an Insider-Trading Problem

The central bankers running the U.S. Federal Reserve are the closest thing we have to gods of the markets, their decisions on interest-rate policies and their bond-buying sprees watched breathlessly by everyone on Wall Street — and increasingly Main Street. Last year, the Fed’s influence became even more pronounced after the central bank pumped trillions of dollars into the markets when the global COVID-19 pandemic hit and financial assets of all kinds went into free fall.

As markets began to bounce back on the Fed’s massive effort, two regional Fed presidents — Boston’s Eric Rosengren and Dallas’s Robert Kaplan — were not sitting in some ivory tower pouring over economic data. No, they were actively trading their personal stock portfolios, benefiting from the Fed’s intervention.

The Fed has been criticized for many things in the past: It has been called a handmaiden to the big banks and accused of widening the gulf between the haves and have-nots in this country with a decade of rock-bottom interest rates that fueled raging-bull markets in stocks and bonds disproportionately benefiting the one percent. But until last year, its members had not been viewed as using their insider status to profit ahead of the public.

Rosengren and Kaplan resigned following a backlash after the trades were revealed through disclosure forms — which incidentally did not include dates of the transactions. Since then, the trades of Fed Chair Jerome Powell, a wealthy former private-equity executive, and Vice-Chair Richard Clarida have come under scrutiny, leading to calls from Senator Elizabeth Warren for the Securities and Exchange Commission to investigate.

This scandal creates more uncertainty around the Federal Reserve, but one certainty is it will lose some independence. What's harder to see is whether the Fed will become more corrupt and beholden to ruling class members such as Nancy Pelosi who want the 1-percent to destroy the 99-percent, or will it fall under the sway of populists? On the left, populists want hyperinflationary spending monetized by the Federal Reserve. They want the Federal Reserve and Wall Street to serve their interests. On the right, populists want power taken away from the Federal Reserve and Wall Street. At the last, they want zero support for bankers and Wall Street if a collapse cometh. The Federal Reserve's policy of "stocks uber alles," of pumping of stocks to the detriment of the economy, workers and social cohesion is coming to an end. This is the looming threat markets have yet to price in, but it could start as soon as Powell's confirmation hearing today.

The Federal Reserve is also losing its credibility as an inflation fighter with the CPI rising and still no rate hikes. The Fed's credibility is low on that score, but people assume they will do something. Hyperinflation doesn't happen because people expect the Federal Reserve will eventually act, when they have to, but this assumption is starting to fray. Finally, the Fed is even losing basic credibility on its public statements.

The Fed is turning into a corrupt clown show because it subverted all of its power to Mammon. To pumping Wall Street above all else, based on the lie that cheap money could somehow combat a corrupt government destroying the economy. The Federal Reserve has near zero power to improve the economy, but it does have great power to destroy. It chose destruction. Now the Devil has come to collect his souls. Will the Federal Reserve redeem itself or condemn itself to hellfire? Stay tuned to find out!