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Whose Corner Is the Fed Really In?

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Whose Corner Is the Fed Really In?

As a wave of support for reform across the federal government gains steam, there is one "federal" institution that tends to resist any calls for transparency or reform: The Federal Reserve.

The nation's central bank is sometimes characterized as the fourth branch of government due to the importance of monetary policy on the U.S. and global economies. Unlike many who serve in the other branches of government, members of the Fed are unelected.

Federal Reserve photo: Public Domain 40 Years Of Federal Reserve Leadership:
(L-R) Janet Yellen, Alan Greenspan, Ben Bernanke, and Paul Volcker

Given that many Americans are unaware or don't understand the ramifications of Fed policy, this begs the question: Whose interests does the Federal Reserve really serve?

(Hint: Unless you're a bank, it's not yours!)

It's (Still) the Economy, Stupid

The New York Times recently published an editorial that suggested the Fed is unduly "scared of inflation." This is actually a fairly reasonable assessment of Fed policy over the last three years. In a general sense, rising interest rates have a suppressing effect on inflationary pressures. In times of high unemployment and recession, low interest rates are believed to help spur greater economic activity (and inflation). By tightening monetary policy (i.e. hiking rates), the central bank can have the opposite influence by moderating the growth of the economy. So far this year, the Fed has hiked rates twice, and many expect one more 0.25% increase before 2017 is over.

The prevailing wisdom is that the Federal Reserve is raising rates not just to normalize monetary policy but also to try and head off inflation. This is a pretty standard course of action when the economy is running hot. While the current period of economic expansion is now in its eighth year, the growth has been both slow and modest. One wonders how many Americans would describe the current economy as "overheated." (The answer: virtually no one who doesn't trade or sell stocks for a living.)

The normal markers for rising inflation are "full employment" and rising wages. It appears that only half of this equation has been satisfied: unemployment remains near its lowest in four decades, yet wage growth has been sluggish—and bordering on stagnant. Consequently, inflation has fallen short of the central bank's 2% target for the past 60 months straight! So what's going on?

The Times points out that the Fed can only do so much to influence these factors with its policy tools alone. Conspicuously absent is any effort on the part of the legislative branch to follow through with a complementary fiscal policy (i.e. spending). Nonetheless, as the steward of the nation's economic health, the Federal Reserve receives the brunt of the blame (and credit) for the response to the last financial crisis.


One glaring issue is the fact that, rather than admitting to any miscalculation or mistake, the Fed members have repeatedly grasped at far-fetched excuses to account for the "anomalous" inflationary trend we currently see. The central bank refuses to acknowledge that its paradigm about unemployment and wage growth may no longer hold. Such is the nature of resorting to unprecedented economic experiments like quantitative easing (QE) for the better part of a decade.

What few folks seem to appreciate is that the consequences of the Fed being wrong would be catastrophic. Because the dollar is for all intents and purposes the reserve currency of the world, the Fed's actions don't just impact America's economy; its decisions reverberate around the developed world. As we've seen in the past, when one domino falls, the entire banking system could teeter on the brink of implosion.

At the same time, unclear or unsuccessful Fed policies can hurt the wallets of average Americans, as well. If banks and businesses can't rely on the Fed for consistency and clarity, it's the consumers who suffer. What would happen to a person's credit card debt? How would it impact adjustable rate mortgages? What about pensions and other retirement plans that depend upon adjustments for inflation or changing interest rates?

These questions all point to one startling fact: The ramifications of failures or errors by the Fed are almost incomprehensibly far-reaching. When individuals must make larger interest payments with no accompanying rise in their wages, it means they will spend less. In turn, businesses see less profit. Everyone suffers financially, except for banks that can charge higher interest rates on loans, credit cards, and mortgages. On top of it all, this pattern of disinflation (chronically low inflation) can actually be a more difficult pickle to get the country out of than high inflation.

Interplanet Janet searches for inflation in interstellar space Interplanet Janet searches for inflation in interstellar space

At last week's central bank meeting at Jackson Hole, Wyoming, Fed Chair Janet Yellen's comments sounded to the audience very much like a foreshadowing of her resignation at the end of her term this year. Although President Trump, who gets to nominate Fed members to their positions, had previously said that he would not rule out renominating Ms. Yellen, he is widely expected to replace her in 2018 with one of his key economic advisors, Gary Cohn.

Yellen essentially took a stand against the administration's agenda of easing financial regulations put in place after the Great Recession that began in 2008. Moreover, the Federal Reserve Board of Governors itself remains fairly divided between doves, like Dallas Fed President Robert Kaplan, and hawks, like Kansas City Fed President Esther George.

While it may be tempting to write off this lack of leadership at the Fed to simple fecklessness, the reality is that the central bank does not work for the interests of everyday Americans. There is nothing to hold the Fed to account in this regard. Its interests are basically self-interest, benefiting its banking buddies rather than protecting the financial futures of U.S. citizens.


The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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