U.S. Federal Reserve Chairman Jerome Powell appeared on 60 minutes May 17th discussing the Fed’s recent operations to stabilize the economy. With the hopes of stimulating economic activity, backstopping the public equity markets, and shoring up the banking system, the Fed injected trillions of dollars by purchasing government securities, providing corporate and small business loans, and purchasing high-yield “junk bond” ETFs.
During the interview, 60 Minutes correspondent Scott Pelley asked, “You simply flooded the system with money?”
Powell responded, “Yes, we did. We printed digitally. As a central bank we have the ability to create money digitally. And we do that by buying treasury bills or bonds or other government guaranteed securities, and that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve bank.”
The Fed’s balance sheet displays its assets and liabilities. Its assets are mainly the securities it purchased on the open market and loans it made to financial institutions and now businesses. Every new asset also creates a liability, which in this case represents the newly “printed” currency added to circulation and bank reserves held at commercial banks. The Fed increased its balance sheet by $2.8 trillion, or 60%, just since February of this year.
Pelley later asked, “Has the Fed done all it can do?”
Powell responded, “There’s a lot more we can do. We’re not out of ammunition by a long shot. There’s really no limit to what we can do with these lending programs that we have.”
The Fed has inordinate power over the direction of the economy by pulling the levers of monetary policy. An entire industry has emerged reading the tea leaves, parsing, and interpreting every comment Powell utters in regards to the Fed’s future actions. Whereas in the past the Fed’s comments were subtler and filled with nuanced, Powell is now pronouncing the Fed’s willingness to take extreme measures to prevent recession without any regard of the long-term consequences.
“The ‘we’ here is five people voting on changes to monetary policy within the Federal Reserve system during FOMC meetings. 5 out of 330,000,000. That’s all it takes to change US monetary policy. Much harder with bitcoin,” remarked Marty Bent.
Historically, gold served as the best hedge against monetary and fiscal exorbitance. Its quality of scarcity, difficulty to produce, and universal acceptance as a store-of-value instantiated this view. The best examples of this are gold’s over-performance immediately following the end of the gold standard in 1971 and…