No entity wields greater unseen power over our daily lives than the Federal Reserve. Since its establishment in 1913 it has been an independent entity, separate from the three branches of government. This boundary is non-negotiable for a stable economy. The Federal Open Market Committee (FOMC) can thus implement monetary policy with the economy’s best interests at heart, unswayed by the everchanging political ideals of the nation. Historically, infringing on this boundary has been disastrous for our economy. Consider the great inflation of the 1970s. During this period, President Nixon pressured then Fed chair Arthur Burns (1970-78) to lower rates ahead of the 1972 election. This direct assault on the central bank’s independence served short term political goals (as low rates are generally more popular with voters) at the expense of the Fed’s ability to maintain price stability. This political pressure did not have the economy’s best interests at heart, and inflation rose dramatically in the 70s, peaking at 13-15% annually. Paul Volcker, who became Fed chair in 1979. Had to consistently keep rates around 20% during the 1980s to curb inflation. This caused multiple severe recessions–a painful but necessary price to restore price stability.
In today's economy, the current administration's constant public pressure on the Fed to lower rates–seeking lower borrowing costs to sustain growth and avoid a recession–may prove harmful down the road. What's good for political goals in the short run may prove disastrous for economic gains in the long run.
Equity Insights
?Wolfspeed inc.(WOLF): After surging 1700+ percent on Monday due to a favorable bankruptcy and debt restructuring court ruling, no one really knows where this stock will go. Speculators are bullish and the bears are planning to reap the rewards of an overvalued and bankrupt semiconductor manufacturing firm.
↑Gold: Gold is up just over 45% YTD and is positioned to rise even further. Gold’s additional rise will come off the backs of the administration's love for uncertainty and tension. This debasement trade will protect against the debasing of the dollar over the foreseeable future. I predict gold to cross the 4,000 mark before the year’s end.
Theme of the Week
On one hand, banks who deposit money at the Federal Reserve get paid interest on these deposits (Interest on Reserve Balances or IORB). These interest payments set the Federal Funds Rate as banks have an incentive to loan out at rates higher than the IORB rate. These interest payments are expenses for the Fed. On the other hand, the Fed makes money from the interest it earns on its security holdings. 2022 marked the first time the Fed has conducted an operating loss (expenses > revenue), this trend has repeated through 2025 with a $77.6 billion operating loss in 2024 alone. These losses mainly result from the Fed’s rate hikes to combat inflation which in turn make their payments on reserve balances higher. The Fed covers their payments by deferring its U.S. treasury remittances and increasing its liabilities. This can be a dangerous reinforcing cycle during times of rate hikes to combat inflation.
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