Congress Needs to Rein In a Too-Powerful Federal Reserve

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congress needs to rein in a too powerful federal reserve • Congress Needs to Rein In a Too-Powerful Federal Reserve banking, Banking/Credit, C&E Executive News Filter, commentaries, Commentaries/Opinions, congress, Content Types, credit, Domestic Politics, Economic News, equity, Factiva Filters, Federal Reserve, Financial Services, fiscal policy, general news, Government Bodies, inflation, interest rates, International Relations, Jerome Powell, Legislative Branch, monetary policy, Opinion, opinions, political, Political/General News, politics, Politics/International Relations, price stability, stock market, SYND, treasury bonds, wage gains, WSJ-PRO-WSJ.com

When Federal Reserve Chairman Jerome Powell speaks, investors listen. They listen as if there are fortunes to be made by guessing correctly about when the Fed might begin cutting back on the amount of U.S. government-backed debt it buys every month. They listen for the stray word that could spook financial markets. Mr. Powell’s speech on Aug. 27 proved to be unspectacular in all the ways that count on Wall Street. Nevertheless, it was a spectacle.

The people striving to interpret every nuanced statement—financial analysts, hedge fund managers, investment bankers—apparently were pleased with Mr. Powell’s performance. The S&P 500 and Nasdaq Composite climbed to records following the Fed chief’s speech, which included his observation that monetary-policy makers shouldn’t “attempt to offset what are likely to be temporary fluctuations in inflation.” Bond yields dropped concurrently with his remarks.

But for people who live off paychecks rather than portfolios, the game of deciphering Fed officials’ intentions is a sideshow that leaves them further behind. This is no way to run monetary policy. Our nation’s central bank has become too prominent, too political and too powerful.

The Fed’s ability to purchase massive quantities of U.S. Treasury securities is the dominant factor influencing interest rates across the board and thus the valuation of financial assets. The entire term structure of bond yields reflecting the relationship between short-term and long-term rates is keyed to the 10-year Treasury note rate. What would that benchmark yield reveal if Fed purchases weren’t distorting the market?

The Fed’s prominence not only undermines supply-and-demand interactions for accurately pricing the cost of investment capital; it also compromises the relationship between fiscal and monetary policy. The Fed’s accommodation of deficit spending by lawmakers poses a conflict of interest with political implications. Besides ensuring that the government’s interest expense for servicing debt is reduced, the Fed remits back to Treasury the earnings on its own holdings.

WSJ

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