FED TO THE LIONS
Powell’s ‘taper’ chase may cost him his job
JEROME Powell should be a layup for a second term as Federal Reserve chair, and yet he’s not. The problem stems from Powell’s plans to begin “tapering,” or ending the Fed’s massive printing of money through asset purchases in the bond market. That’s leaving him vulnerable on reappointment, a growing number of Wall Street Fed watchers tell me.
The bear case for Powell starts when his tapering exposes the big lie being promulgated by the Democratic leadership that their new spending plan is “paid for.”
Without the Fed’s snapping up all that debt to fund the blowout, the lie would be made public through sharply higher interest rates next year because there aren’t enough taxes to be raised or foreign buyers to fund our deficit, according to the Powell-reappointment naysayers.
Those higher rates on Treasury debt would almost certainly cause a recession, Congress would turn red and Joe Biden’s goal to emulate FDR would turn to mud.
That is really why you hear progressives like Sen. Elizabeth Warren calling for Powell’s head, these people say. It’s also why the White House, despite public statements in support of Powell, is said to be having second thoughts on his reappointment.
As the nation’s central bank, the Federal Reserve is supposed to control the money supply without fear of political repercussions. Yet its dual mandate of keeping inflation low while maintaining full employment is always a careful balancing act with obvious political implications.
Paul Volcker defined the office’s independence with huge rate increases during the late 1970s and early 1980s. It helped cost Jimmy Carter the presidency, but wiped out the scourge of inflation that was ravaging the US economy and destroying the middle and working classes.
We’ve come a long way from the days of Volcker, unfortunately. My colleague Neil Cavuto says Powell reminds him more of Alfred Pennyworth, the uber-loyal butler to Bruce Wayne in the Batman saga.
Powell’s Fed track record shows he’s often been far more obsequious than ol’ Alfred. Recall that it took just a few mean tweets from President Trump a few years ago for Powell to back off obviously necessary Fed rate increases when the economy appeared to be overheating.
After Trump lost to Biden in November’s election, Powell continued to print money at an alarming pace, maintaining a near zerointerest-rate policy and massive asset purchases despite the postCOVID recovery.
Now Powell has suddenly started to show some spine, and with good reason: Prices on everything from food to housing are spiking with no end in sight. There’s so much money sloshing around that average people are trading fake cryptocurrencies and chasing money-losing meme stocks.
These types of asset bubbles never end well. (Think the 2008 financial crisis, or the Nasdaq crash before that.) Even worse, inflation is a pernicious tax on working people, which history shows is the fastest way to sow societal unrest.
That’s where the taper comes in. When the Fed buys bonds, as it’s been doing since the pandemic hit, it’s juicing the economy for growth; rates fall and banks awash in cash lend to businesses.
When the Fed sells bonds, it wants to achieve the opposite: slowing the economy to quell inflation as interest rates rise.
Through the policy of tapering, Powell is looking to slow all this just a bit by ratcheting back the trillions of dollars in bond purchases the Fed has been making since the pandemic began. If Powell doesn’t blink, the Fed will go from buying at least $120 billion a month in bonds to buying zero in the next year.
But Powell’s plans to protect the middle class are running into the Democratic Party’s plans to remake the economy through massive social spending. Warren, Bernie Sanders, AOC and the lefties who have been setting Biden’s economic agenda know the $5 trillion in spending they’re demanding isn’t “paid for” unless the Fed helps foot the bill.
Of course, there are those on Wall Street who say Biden won’t risk the possible market tumult that could accompany replacing Powell. Investors could lose confidence in the US financial system and might sell US stocks, bonds and just about everything else.
Maybe the Dems’ spending plans get killed by the two Dem holdouts, Sens. Joe Manchin and Kyrsten Sinema, and Powell can have his taper.
There are others — and their numbers are growing — that believe Manchin and Sinema will largely cave to the demands of their party. Biden, in between licks of those ice cream cones, will be bullied by the lefties into replacing or at least defenestrating Powell. Ta-ta to the taper.