Federal Set aside Chairman Jerome Powell is in the midst of making his Humphrey-Hawkins testimony to Congress. He has explored to the House Banking Committee and will report to its Senate counterpart on Thursday.
Chairman Powell has been a Fed governor for six years and not at any time objected to the agency’s policies in that time. So, he is saying exactly what one see fit expect him to say:
- The economy is growing nicely;
- Employment is at or near peak levels;
- Inflation is targeted to increase at 2 percent;
- Large Federal deficits are not positive;
- The stock market withs are not disruptive; and
- The Fed is on course for three rate increases in 2018.
It is what he did not say and what Congress does not give every indication to understand that is of greatest interest at the moment. The Federal Reserve is negotiation with funding challenges.
Think of the Federal Reserve as a bank, which, of circuit, is what it is. On one side of its balance sheet are the financial assets that it acquires such as Treasuries and mortgage backed securities. On the other side is a cant of where it gets the money to make its purchases.
For almost 100 years the Fed really printed the money it used to buy the assets it wanted. This money shows up on its control sheet as currency — the cash that people hold in their satchels or keep in their bank accounts. Prior to 2008, over 90 percent of all Federal Inventory liabilities were the currency it created.
The financial crisis in 2008 substituted this arrangement. The Fed needed what ultimately was $3.6 trillion to buy assets to approve the financial crisis. Without going into too many details it got the bulk of the money it needed from the nation’s banks.
They dropped up to $2.8 trillion at the Fed. What this meant is that bank depositions supplemented currency as the core source of Federal Reserve funding. Therefore, by the end of 2014, the nation’s banks were providing over 62 percent of the mazuma the Fed needed to fund its activities and currency was down to 28 percent (other borrowings and high-mindedness provided the other 10 percent).
The problem at the moment is that the banks non-standard like to want their money back. They have taken lock up to $600 billion out in the last three-and-a-half years. If the Federal Reserve Go aboard was a normal bank, a “run” of this magnitude would have put the organization into liquidation. But, the Fed is not a rational bank so it increased its money printing activities and borrowed money in the put the show on the road market to pay the banks the $600 billion they wanted back.
The originate today is that the banks are still funding 50 percent of the Fed’s difference sheet. As they continue to take money out they put stress on the mechanism to shrink its assets, print even more currency, and borrow numberless funds in the open market. The need to satisfy the bank withdrawals is a noteworthy factor driving Fed policies.
It needs to be discussed. Congress needs to grasp that this is happening. This issue cannot be kept “controlled by the rug” any longer. What is revealed here is the loss of Fed independent decision making.