Here's What The Federal Reserve Must Do To Help Our Vulnerable Economy

Key Concepts

• Federal Reserve (The Fed): The central bank of the United States.
• Interest Rates: The percentage of a loan paid in addition to the principal.
• Tariffs: Taxes imposed on imported goods.
• Inflation: A general increase in prices and fall in the purchasing value of money.
• Monetary Inflation: An increase in the money supply, which can lead to inflation.
• Gold Standard: A monetary system where a country's currency is directly linked to a fixed quantity of gold.
• Reserves: The amount of funds that banks hold in their account at their Reserve Bank or in their vault cash.
• Liquidity: The availability of liquid assets to a market or company.
• Hubris: Excessive pride or self-confidence.

Federal Reserve Meeting and Economic Concerns

• The Federal Reserve is meeting to decide on interest rates. The consensus is that they will hold steady, citing the need to assess the impact of President Trump's tariffs on the economy.
• Steve Forbes argues this is a mistake, as the economy is showing signs of weakening. The uncertainty surrounding trade and tariff rules is weighing on economic activity.
• Markets are assuming trade deals will be reached, particularly with China, given its economic troubles and the potential for Xi Jinping to divert attention through actions regarding Taiwan.

Critique of the Federal Reserve's Operating Model

• Forbes criticizes the Fed's "facious premise" that prosperity causes inflation. He argues that the Fed mistakenly believes it can cure inflation by depressing economic activity.
• The Fed fails to distinguish between higher prices caused by regulations, taxes, and production disruptions (like the pandemic) and price changes caused by the dollar losing value.
• The Fed's policies cannot address higher costs brought on by tariffs.

Inflation and the Value of the Dollar

• The surge in the dollar price of gold indicates that inflation is coming in the next year or so. The upswing in gold in 2019 foreshadowed the recent round of inflation.
• This rise in prices was exacerbated by government actions during the COVID crisis.

Recommendations for the Federal Reserve

• To avoid appearing to cave into political pressure, the Fed should slash the interest it pays on reserves banks have on deposit at the Fed (currently 4.4%). Forbes suggests cutting it in half.
• The Fed should make it clear that banks won't be penalized for boosting lending.
• Given the economic challenges since the 2008-2009 crisis, economies need liquidity to prevent defaults.
• The Fed must abandon its "bogus prosperity caused inflation dogma" and work to keep the dollar stable in value, using the price of gold as a key measure.
• The Fed should urge the Treasury to issue bonds backed by gold to demonstrate a commitment to a strong dollar. Treasury Secretary Bessant has declared that the administration wants a strong dollar and selling bonds would be a proof of this.

Addressing Hubris and Wasteful Spending

• Forbes criticizes the Fed's lavish $2.5 billion revamp of its Washington headquarters, including a special elevator bank for high-level officials and an exclusive dining room. This project is already $600 million over budget and won't be completed until 2027.
• Halting this project would be another step towards restoring trust in the institution.

Conclusion

• A sensible monetary policy and abandonment of its hubris will make the central bank again an institution we can trust.
• The Fed needs to address its flawed operating model, focus on maintaining the dollar's stability, and avoid wasteful spending to regain public trust and effectively support the economy.