Marc Cuniberti (Money Matters): The collision ahead for the Fed

The Federal Reserve of the United States (the Fed) is tasked with administering monetary policy to safeguard and hopefully steer the U.S. economy through calm waters and avoid hitting the rocks of recession or depression.

Recessions and depressions can cause massive damage to businesses and consumers alike. We all know such economic calamites can cause people to lose their jobs, businesses to go broke and destroys the lives of many individuals and families alike.

No easy task does the Federal Reserve have. Economies, after all, are the engine of prosperity. For many, they are the vehicles of necessity. Putting food on the table, keeping the house warm and basically allowing people to live their lives without unnecessary hardship, a healthy economy is not only preferred but necessary.

Although many argue an economy is too complicated with too many working parts to pilot by any one entity, others believe a central body like the Federal Reserve is necessary to prevent a series of events from spiraling into a severe economic malaise.

The Federal Reserve is called the central bank. There are many central banks of countries throughout the world and each use similar monetary tools to accomplish their task.

The Federal Reserve has the edict to control currency stability and promote full employment. Controlling currency stability is known as avoiding excessive inflation. Promoting full employment is the highest level of employment the economy can sustain without generating unwelcome inflation. Therefore, the full employment mission is intertwined with the Feds other mission of controlling inflation.

The tools it uses to accomplish this delicate balance between inflation and employment is throttling up or down the money supply of the country, hence the word “monetary”, which refers to money. It does this through interest rate manipulation and a variety of other tools to control the amount of money floating around in the economy.

With a presidential election coming up, a bad unemployment figure would reflect negatively on the current administration. Conversely, a high inflation number would also not be conducive.

With the Federal Reserve supposedly being an independent body from the government and not beholden to political pressure, it is one of life’s conundrums on how a central bank can truly be independent come election time.

The Fed initiated most of its tools to quell inflation in 2023. Some say it wanted to be done manipulating the economy by the end of 2023 so it would not have to act in an election year so as not to appear supporting one candidate or the other.

The problem is the Fed expected inflation to have receded by now so it could start to normalize monetary policy. Unfortunately, inflation, although slowing, is still elevated.

To address inflation, the Fed has had to keep interest rates elevated. High rates hurt the consumer. Not good for the incumbent with an election coming up.

Had inflation subsided to acceptable levels, the Fed could have begun to lower rates, which would have helped already-struggling consumers.

With inflation high, however, rates have to remain high.

If the Fed continues to keep rates high (as they should to address inflation), they could be accused of hurting the incumbent president’s chances of being reelected.

It is said the consumers vote with their pocketbook. And unfortunately, with high inflation and high interest rates, while not necessarily completely to blame, both reflect badly on the current administration.

The Fed would like to remain neutral and not have to use its monetary tools during an election year, but inflation is not cooperating.

The Feds know lowering rates while inflation is still high could spell even bigger trouble inflation-wise down the road. Hence, it must keep rates high.

Simply put, the Fed is in a box.

Lowering rates to appear neutral and inflation would likely continue to increase.

Consumers are already rebelling against inflation and pointing fingers at Washington. Higher interest rates are also crippling consumers through higher credit costs for both businesses and individuals. Both environments are angering consumers. And if history is any indication, when consumers are struggling, incumbent administrations soon will be, come the election.

Although the Federal Reserve wants to appear unbiased as to what political party it supports, the economy is not cooperating.

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a BA in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. insurance services. Email: [email protected]