In a sense, the name of the game in the mainstream world of commentary and speculation is to figure out what the Federal Reserve is thinking and signaling, given that the Federal Reserve is central to a decentralized economy like ours in the United States. And it is all essentially a paradox, given that there is centrality to the system despite the decentralization as a result of the Federal Reserve. Hence, it is both timely and worthwhile to step into the Federal Reserve’s shoes and at least try to decipher the meaning behind their signals which one must note have caused quite a stir around the world and especially in the United States, even if we do not get the whole story or the whole truth, given that the Federal Reserve is known to be an institution that is shrouded in both myth and secrecy to a certain extent.
For one, we should perhaps ask what would you do if you were the main engine and institution behind the world’s largest national economy and you were facing both war and inflation, yet you know full well that war and inflation are the two biggest factors above all else which can drive the economy down to the ground? Essentially, you have two options, as I hinted to a few experts this morning. For one, there is “Quantitative Easing” (QE) as a means to bring down inflation and in turn stimulate the economy. And the second option, as we have seen as of late, is that interest rates can be raised in order to slow demand and thus slow inflation. At least that is what the theory dictates.
We must note that raising interest rates is the weapon of last resort for the Federal Reserve to fight inflation. Thus, before raising interest rates, the Federal Reserve has to try QE. So why did the Federal Reserve resort to a bunch of interest rate hikes in recent months if QE was the other option? Because the Federal Reserve already resorted to QE in recent years, and it had the opposite effect of what it was intended for. As opposed to going down, inflation went up as a result of QE, even though the intent of QE is to fight inflation. Thus, and it may be hard to take the Federal Reserve for their word, but when the Federal Reserve says that it has resorted to interest rate hikes as a means to fight inflation, it means they had no other option because they essentially exhausted the other option that was available to them to fight inflation, and this time around, we should perhaps take the Federal Reserve for their word.
For QE to have worked over the last few years, central government fiscal policy needed to have changed. In essence, QE has to act in conjunction with fiscal policy changes in order for QE to work. But that did not happen over the course of the last few years, and as a result, QE actually had the opposite effect of what it was intended for. In sum, for the Federal Reserve, the options were very limited in the face of a decades-long scenario rooted in inflation and war, because the root cause of the inflation and war is a whole-of-government policy rooted in antiquity which is now obsolete and failed. Moreover, the Federal Reserve has its own constituency to worry about, namely, its shareholders. And while the Federal Reserve can try to address inflation and hit two birds with one stone through interest rate hikes, the priority when it comes to raising interest rates lies elsewhere for the Federal Reserve. Perhaps the Federal Reserve can stop lending to the central government in order to get its fiscal policy in order as leverage and as a means to address inflation, but whether that happens remains to be seen and it could be unlikely. However, all is uncertainty, and there is a spectrum of possibilities amidst this ongoing situation. Another thing worth observing is whether banks get off scot free from being intertwined with the core policy that has caused all the problems we face at the moment. It is possible that they will get off scot free, because as mentioned before, the policy was a political decision on the part of a very small cabal or group, and as a result, the banks cannot be fully blamed for that decision.