The Federal Reserve Dilemma

On August 5, 2024, Cogport posted a report that the Federal Reserve had become over restrictive with interest rates.

Background

In January 2022, the Fed Rate was the lowest in history at 0.25% in response to the Covid induced economic downturn.

At the same time the Biden Administration radically increased Federal Spending to record highs.

The Economy naturally bounced back from the Covid downturn when businesses started to re-open and expand to pre-Covid levels.

The Administration policies invoked were overkill and resulted in the highest inflation since the 1970’s, and a reduction in real wages for workers of over 10%.

As inflation rose to 8% annual (16% peak), the Federal reserve acted to raise the Target Funds Rate to 5.5% by August 2024 to quell inflation. (Compared to 0.25% in January, 2022).

Fed Policy had its effect, and inflation was down to 2.8 % in 2024. Fed Rates up to 5.25% were overly restrictive. The Fed was extremely slow to act on reducing rates.

In the August 2024, Cogport post, we suggested an immediate reduction in Fed Market Rates by at least 0.5% at the September 2024 meeting, or sooner.

Why ? The Fed Rate was more than 2% above inflation. This would strangle the economy and risk recession.

What followed:

  September 18, 2024: The Fed cut the rate by 25 bps, from 5.00–5.25% to 4.75–5.00%

  November 7, 2024: Another 25 bps cut brought the rate to 4.50–4.75% .

  December 18, 2024: A third 25 bps cut lowered it further to 4.25–4.50%,

That was a total Reduction of  0.75%. Too little.

Since December, no changes have been made.

That kind of difference between inflation and Fund Rates chokes the Economy.

The Current Situation

The annualized Inflation Rate has fallen to 2.3% by April, 2025

The Projected Rate is 2.35% for June, 2025

Inflation has continued to fall despite all the Fear Mongering about Tariffs.

Today the Fed is more restrictive than ever with a Fed Rate almost 3% above inflation.

Jerome Powell, the current Federal Reserve Chairman, is fixated with the old paradigm that Tariffs will increase costs and cause inflation. 

That is not necessarily true.

The Federal Reserve has provided absolutely no transparency or data models for their decisions.

SO what we have is a Fed Reserve chokehold on the economy that thwarts Growth and maintains a very high cost of interest for the Federal Government on the National Debt.

That contributes to a higher Federal Budget Deficit.

About Jerome Powell

Jerome Powell, the Fed Chairman, is not a trained economist.  He has a B.A. degree in Politics and a J.D. degree from Georgetown University.

A rare Fed Chair without an economics PhD—majored in politics and admitted later he underestimated economics, initially calling it “boring and useless”.

Jerome Powell began his tenure on the Federal Reserve Board of Governors when he was nominated by President Obama on December 27, 2011

He later became Chair of the Federal Reserve on February 5, 2018, after being appointed by President Trump and confirmed by the Senate.  An appointment that Trump now regrets.

Biden reappointed Powell to a second four-year term as Chair of the Federal Reserve on November 22, 2021.

Powell’s second four-year term as Chair of the Federal Reserve is set to expire on May 15, 2026.

Powell can only be removed for cause, which is a high legal bar. The President cannot demote or remove him from office at will before his term ends.

Summary

Cogport supports the concept of an independent Federal Reserve to set interest rates with the mission of controlling inflation, balanced with minimizing unemployment.

These are economic decisions with the leverage power of interest rates best kept out of the hands of Political Influence.  The history of the Federal Reserve has been good management.

However, some reforms should be considered considering the current situation when the decision process has become unsatisfactory.

Reforms suggested:

• The president should have the power to propose a change in Chairman for poor performance with approval of a majority of the Senate.

• The Federal Reserve should publish their data models and analysis for interest rate decisions.  They have long been cloaked in mystery, and the people and businesses deserve more Transparency.

David Hollaender                           June 19, 2025     Copyright

Cogport.com