The Federal Reserve

This is a sort of unusual topic for me, but I decided to write a little about it because Donald Trump has been attacking Jerome Powell, who is the current chairman of the Federal Reserve. As an investor, I have been following the Federal Reserve for many years. In case you don't know, the Federal Reserve was set up partially to depoliticize policy decisions regarding the financial system in the U.S. and to protect it from abuse by political operatives. I think it important to understand this, especially now, when news coverage is clearly inadequate. I'm getting very tired of PBS NewsHour.

After I graduated from college in 1972, inflation gradually rose to high levels. At that time, I also think that the U.S. economy began to restructure due to foreign manufacturing competition, particularly from Japan. The Vietnam War, which was unjustified, was also costly, and a strong inflationary trend developed. Political parties tend to kick the can down the road, such that they can blame their errors on future administrations. During this process, the Johnson, Nixon and Ford administrations oversaw inflationary pressures that lasted for several years. By the time that Jimmy Carter became president in 1978, inflation was taking off.  Carter appointed Paul Volcker chairman of the Federal Reserve in 1979, and he served until 1987. During Volcker's tenure, the Federal Reserve took draconian actions in which they intentionally raised interest rates in order to reduce inflation. My first house was purchased with a 13% mortgage rate in 1980. Volcker is now considered to have been one of the best chairmen. Later on, Alan Greenspan got mixed reviews as chairman, because he mishandled the dot-com bubble in 2000 and laid the groundwork for the Great Recession, from 2007 to 2009, by deemphasizing financial regulation before he left in 2006.

In my opinion, Jerome Powell is doing a good job as chairman, as was Janet Yellen, his predecessor, and he has generally been reducing inflation and improving employment since the pandemic, his two main mandates. The situation with Trump now is so transparent that, to a knowledgeable audience, he is simply confirming to them that he is ignorant and self-centered. Trump and his advisors want to forestall an economic slowdown, with unemployment, by introducing economic stimulus through interest rate reductions, which would cause inflation. Trump's tariff program is inflationary. So far, because the Federal Reserve is specifically designed to prevent rash policy actions promoted by politicians, and because Trump can't replace him until next year, when his term ends, we still have some protections. Trump wanted to remove Powell ahead of time, but he seems to have received enough pushback to stop for now. Even so, he continues to belittle Powell publicly, not caring that Powell is obviously more competent than he is.

I still can't predict the exact timing of the collapse of the Trump administration, but it seems to me that he has created a situation from which he will never recover. At the moment, it looks as if he will not succeed in creating any benefits for low- and middle-income voters, the Republicans will lose seats in congress, and he will generally lose his influence.

While I am still quite disappointed with how the news media has been handling the Trump phenomenon, there are now some pretty good voices out there. I particularly admire Jennifer Rubin, who currently communicates through The Contrarian. Ironically, Rubin was previously known as a conservative. What counts for me is that she has a brain that actually works and isn't a congenital money-grubber. From speaking to a couple of random Vermonters recently, I was also heartened to see that there is a simmering Trump hatred here, and probably everywhere – a positive sign indeed.