Reuters describes the action the Fed is taking to eliminate the inherent conflicts of interest that Fed officials have:

Two Federal Reserve officials said on Thursday they would sell their individual stock holdings by the end of the month to address the appearance of conflicts of interest.

Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren issued statements saying they would invest the proceeds of those sales in diversified index funds and cash savings and would not trade in those accounts as long as they are serving in their roles.

The announcements come after the officials faced scrutiny over trades they made last year, according to their financial disclosure forms.

The Fed’s Potential Conflict of Interest Scandal Grows

Since that first story broke, the scope of the Fed’s potential conflict of interest scandal has become bigger. CNBC reports:

Amid an outcry about Federal Reserve officials owning and trading individual securities, an in-depth look by CNBC at officials’ financial disclosures found three who last year held assets of the same type the Fed itself was buying, including Chairman Jerome Powell.

None of these holdings or transactions appeared to violate the Fed’s code of conduct. But they raise further questions about the Fed’s conflict of interest policies and the oversight of central bank officials.

• Powell held between $1.25 million and $2.5 million of municipal bonds. They were just a small portion of his total reported assets. While the bonds were purchased before 2019, they were held while the Fed last year bought more than $5 billion in munis, including one from the state of Illinois purchased by his family trust in 2016.
• Boston Fed President Eric Rosengren held between $151,000 and $800,000 worth of real estate investment trusts that owned mortgage-backed securities. He made as many as 37 separate trades in the four REITS while the Fed purchased almost $700 billion in MBS.
• Richmond Fed President Thomas Barkin held $1.35 million to $3 million in individual corporate bonds purchased before 2020. They include bonds of Pepsi, Home Depot and Eli Lilly. The Fed last year opened a corporate bond-buying facility and purchased $46.5 billion of corporate bonds.

I’ll give the Fed credit for seeking to get ahead of its conflict of interest problem. There is not any evidence of which I’m aware that suggests any investments were made to take advantage of the Fed’s pandemic stimulus policies. But it does stand as a case study for how questions of integrity should be addressed.

How Not to Address Conflicts of Interest

Let’s contrast what the Fed is doing with that of another institution. One that is doing nothing to address its official’s conflict of interest problems: the U.S. Congress.

The U.S. Congress places almost no restrictions on how either elected officials or congressional staff members may invest, a benefit that extends to their family members. The Harvard Business Review explains why that’s a huge, unaddressed mistake:

Congresspeople in both political parties have substantial holdings in firms their legislative actions affect—and this number has grown substantially in recent years. While roughly 20% of lawmakers owned stock in 2001, that number had more than doubled by 2013. As of the most recent data (2014 from the Senate and 2016 from the House), over half of Congress owns stock, many with holdings in excess of $100,000 in stocks alone, not to mention mutual funds and other forms of investments. In addition, as of 2014 over half of lawmakers were millionaires.

This data says there’s a lot of potential for congressional officials to profit from conflicts of interest. But do they exploit these opportunities?

How to Get Rich in Congress

The Harvard researchers found that congressional officials were uniquely successful with their investing. They attribute that success to the insider information and power they have over legislation and fiscal policy:

... firms where a greater percentage of lawmakers invest have significantly higher performance in the subsequent year—with each percentage of congressional membership owning stock worth about a 1% improvement in ROA or Tobin’s Q—suggesting that politicians may be privy to nonpublic information about future regulatory or legislative actions that may prove helpful to these companies. It’s also possible that members of Congress use their influence to benefit the firms in which they invest.

This finding dovetails with prior research that shows members of the House and Senate generate abnormally higher returns on their investments. This likely occurs because members of Congress have a variety of tools at their disposal—from pushing or stalling legislation and regulation to awarding contracts, subsidies, and tax abatements—any of which can aid the firms in their investment portfolios.

Flouting the Few Rules They Do Have

Congressional officials are supposed to publicly disclose their investments within 45 days of making them under the Stop Trading on Congressional Knowledge (STOCK) Act. Except many fail to comply and there are few consequences for failing to report them. Fox Business reports:

A government watchdog group asked the Office of Congressional Ethics last week to investigate Assistant Speaker of the House Katherine Clark, D-Mass., for apparently failing to timely disclose up to $285,000 in financial transactions—making the potential successor to House Speaker Nancy Pelosi, D-Calif., the latest among numerous House and Senate members to face ethics complaints about allegedly violating the STOCK Act....

Specifically, Clark, first elected in 2012, failed to publicly disclose 19 personal stock transactions by her husband within 45 days, according to the ethics complaint. This included investments in Google’s parent company Alphabet Inc.; Best Buy; First Solar; investment firm BlackRock; pharmaceutical company GlaxoSmithKline; data management company Iron Mountain; and water technology company Xylem Inc. The transactions valued between $19,019 and $285,000, were made on June 4 but were not disclosed until Aug. 15....

“These disclosure reports are the only way for citizens and watchdog organizations to monitor election officials and determine if they are profiting from positions,” Kendra Arnold, executive director of FACT, told Fox News. “The only way to determine this in a timely manner is if they file the reports on time. Some lawmakers file the reports two years or six months late.”

There don’t appear to be any meaningful consequences for flouting the few rules they do have.

Remedies

There are ways to remedy this situation. In the executive branch, a typical solution involves placing officials’ investments into a blind trust. This way, they don’t have control over how their investments are made.

But perhaps a better solution would be to bar congressional officials from being able to invest in anything other than U.S. Treasuries. At least then, we would never have to worry about the U.S. government defaulting on the national debt.

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The good news is that prices increased by only 0.2% in August, but even that amount of inflation represents an annual rate of 2.4%, which is 20% higher than the Federal Reserve’s target inflation rate of 2%. Even the good news isn’t all that good.

Inflation tends to run higher in the first half of the year (which is one reason data are often seasonally adjusted). In August of 2020 prices increased by only 1.3%, so inflation this August was 50% higher in August of 2021 than in August of 2020. Again, the good news is not all that good.

Inflation over the past year, from August 2020 to August 2021, has been 5.2%, so we are headed for uncomfortably high inflation for the full calendar year. Prices have already increased by 5% since the beginning of the year, so even if prices do not increase at all for the rest of the year, we will end the year with 5% inflation.

The fact that policymakers at the Federal Reserve, and more generally, in the federal government, are not troubled by rising inflation is in itself troubling. We saw in the 1970s that once inflation is underway, stopping it is difficult and painful. Perhaps experiences from half a century ago don’t have much influence today.

People who actually buy things have told me that the prices they pay have gone up much more than the government’s official data. That may be, but I’m looking at the numbers the federal government is reporting, and I don’t see good news there on the inflation front.

The post August Inflation Lower than Expected: Look at the Numbers appeared first on The Beacon.

Powell’s view rests heavily on interruptions in the supply chain that have caused temporary shortages leading to price spikes. Powell recognizes that declines in demand in 2020 led to low inflation that year, and says that the 2021 inflation spike is only offsetting unusually low inflation from 2020.

There are arguments leaning in the other direction, however—most significantly, the effect of inflationary expectations. Sellers are reluctant to raise prices when inflation is low, so it takes a while for inflationary monetary policies to result in actual inflation. Once people expect inflation, they are quicker to raise prices to keep up with the general rise in prices. As the 1970s showed, inflation, once started, can be difficult to stop.

Let’s set aside those various arguments and look at the official numbers from the Bureau of Labor Statistics. The most highly-publicized number is the year-over-year inflation rate (from June 2020 to June 2021), which is 5.4%. The Consumer Price Index rose by 0.9% in June alone. Those numbers reveal the spike that Powell says is temporary.

At the end of the linked article, John Williams, President of the Federal Reserve Bank of New York, says he expects inflation to be around 3% this year, dropping to 2% in 2022. That is unlikely.

Inflation in the first six months of 2021 (December 2020 to June 2021) has been 4.3%. That would be the year-end 2021 inflation rate if prices do not rise at all for the remainder of the year. That won’t happen. Williams’ projection of 3% inflation this year is wishful thinking.

Powell conjectured that the current spike in inflation is a result of prices catching up from unusually low inflation in 2020. That conjecture is questionable. For one thing, inflation in 2020 was not exceptionally low. It was 1.4% over the whole year, which is not too far from the Fed’s stated 2% target inflation rate. Going back to June of 2019, prices have risen 6.1% over the past two years, so even with a low inflation rate in 2020, the average annual inflation rate over the past two years is a bit over 3%. Even if Powell’s conjecture is correct, inflation over the past two years has been 50% higher than what the Fed says it is targeting.

People I talk with who actually buy things tell me the prices they pay are rising much faster than the official numbers. Maybe. But I’m looking at the government’s own inflation numbers and there’s not much in them to suggest that the current inflation spike is transitory.

John Williams, the New York Fed President, is expecting 3% inflation this year. I’m expecting inflation in 2021 to be above 5%. In six months, we’ll be able to look at the actual numbers and see whose estimate was closer.

The post Is Our Current Inflation Temporary? Look at the Numbers appeared first on The Beacon.

What can we expect, looking ahead? From March to December of 2020 the CPI was up 1.6%, which means that if the CPI rises 1.6% for the rest of this year, inflation at year-end will be 4.2%. There’s a good chance that inflation for the remainder of the year will be higher than that, in which case even 5% inflation for 2021 would be a conservative estimate.

Looking at the table linked above, you can see that in most years inflation tends to run higher in the first half of the year compared to the last half, which weighs against my inflation prediction in the previous paragraph. But inflation was dampened last year by a reduction in consumer demand due to the COVID pandemic, and is likely to accelerate this year as the pandemic subsides and consumer demand picks up again. That’s what we saw in March. So I’m expecting more inflation.

Then there is the easy money policy of the Federal Reserve (Fed), which may be politically difficult to reverse. Adding to pressure on the Fed is the huge federal budget deficit which is pushing the Fed to buy government bonds, which creates money. In the 1960s and 1970s the Fed was very accommodating with its monetary policy, but shifted gears in the 1980s to focus on reducing inflation. The Fed’s policy has reversed in the twenty-first century, it appears that the negative consequences are starting to appear.

The inflation rate for all of 2020 was 1.4%, but that’s deceiving because of the big drop in prices due to the pandemic. The inflation rate from February 2019 to February 2020 was 2.3%, so at that point inflation was already picking up and was only temporarily delayed by the pandemic economy. I will be surprised if this year’s annual inflation rate is less than 5%. Look for more inflation ahead.

The post Inflation Facts appeared first on The Beacon.

If you listen to the economists shaping the Biden administration’s policy agenda, they say they do not. Their basic argument is that with interest rates so low, the government can borrow as much as politicians want to spend. They think they never have to worry about paying the debt.

On April 14, 2021, Federal Reserve Chair Jerome Powell spoke with David Rubenstein of the Economic Club of Washington, DC. A transcript of their whole discussion is available on C-SPAN. Here’s the money quote about whether the Fed Chief thinks the new spending proposed by the Biden administration is sustainable:

Rubenstein: Are you worried about deficits? The debt is pretty high, $27 trillion or so, the deficit is $3 trillion or so. Is that a concern to the Fed in terms of impacting inflation?

Powell: Yes. Over time and in the longer run, the U.S. federal budget is on an unsustainable path, meaning that the debt is growing meaningfully faster than the economy and that’s unsustainable over time by definition.

But then Powell said something surprising with respect to the government’s current debt level:

Powell: It’s a different thing to say that the current level is unsustainable. It’s not. The current level is very sustainable and there is no question of our ability to service and issue the debt for the foreseeable future. I would also say that as a nation, we will have to eventually get back to a sustainable path. That’s best done in good times, when the economy is at full employment and when taxes are rolling in. This is not the time to prioritize the concern, but it’s nonetheless an important concern that we will ultimately have to return to when the economy is strong.

With the lifting of repressive state and local government lockdowns, the U.S. economy will grow rapidly this year. Worse, because the U.S. government has spent so much giving out stimulus checks, inflation has been unleashed. A trip to any grocery store, gas station, car lot, or real estate office can confirm that truth.

That is to say the time for the Fed to be concerned is now. The need for action to put the U.S. government onto a sustainable fiscal path will come much sooner than many expect.

But the leadership for that action will not come from the White House. Powell seems to understand the action will be needed and will require the Fed to hike interest rates. The question is when will he and the Fed take steps to rein in President Biden’s unsustainable spending spree by making the debt to fund it too costly to consider?

The post Fed Chief Says U.S. on Unsustainable Fiscal Path appeared first on The Beacon.

Since being sworn in, he has:

• Signed a bill to spend $1.9 trillion for COVID ‘relief’
• Proposed spending another $2.0 trillion for ‘infrastructure’
• Proposed $1.5 trillion of discretionary spending in the U.S. government’s budget

It’s no surprise that much of this new spending is being funded by borrowing. Through Wednesday, April 7, 2021, the U.S. government’s total public debt outstanding has risen by $329.6 billion to $28,081.5 billion. That’s an average of $4.28 billion of new borrowing per day.

What really stands out however is that the U.S. government has borrowed nearly all that money from the Federal Reserve. In the 77 days from January 20 through April 7, 2021, the Fed’s balance sheet increased by $215.5 billion worth of U.S. government-issued treasuries, which accounts for 65% of the increase in the government’s total public debt outstanding by itself.

The Fed’s percentage share of the net increase in the national debt rises to 91% when you add in its acquisition of $84.8 billion worth of mortgage-backed securities issued by U.S. government-supported enterprises backed by the U.S. Treasury.

That dominating share says a lot about how President Biden intends to fund all his new spending.

What could possibly go wrong for ordinary Americans?

The post Who Is Paying for President Biden’s Spending? appeared first on The Beacon.

Here’s the CBO’s chart showing that gloomy outlook:

Here is how Reuters describes the CBO’s projected runaway growth of the U.S. government’s debt:

The U.S. federal debt burden will double over the next 30 years, reaching 202% of economic output in 2051, as deficits grow and interest rates eventually rise, the Congressional Budget Office said on Thursday in its latest long-term budget projections.

The non-partisan CBO projected that federal debt will reach 102% of gross domestic product in 2021 due to massive spending associated with the coronavirus pandemic. This spending is expected to fade over the next decade, shrinking annual deficits to an average of 4.4% of GDP in the 2022-2031 period, from 10.3% in 2021.

But deficits are forecast to then grow to average 7.9% of GDP in the 2032-2041 period and 11.5% of GDP in the 2042-2051 period, the CBO said in its projections, which it noted are based on currently enacted laws.

The culprit behind the runaway debt will come as no surprise: runaway government spending. The CBO provides the following three-part chart to show that unrestrained spending will cause the exponential growth of the national debt well above the national emergency levels of both World War 2 and the Coronavirus Pandemic.

One of the two biggest drivers in the U.S. government’s rising spending is the combined expenditures for major health care programs, such as Medicare, Medicaid, and to sustain the Affordable Care Act. The bigger driver, however, is net interest on the national debt, which is itself driven by two factors. The national debt has already grown to an enormous size, and the CBO reasonably expects interest rates will rise in the future.

Outside the CBO’s Current Long-Term Outlook

Reuters also reports what the CBO’s projections do not include:

The projections do not include any effects of President Joe Biden’s proposed $1.9 trillion coronavirus stimulus bill, nor his planned investments in infrastructure, education and research.

The $1.9 trillion American Rescue Plan lacks bipartisan support because the spending bill is larded with waste. Wasteful expenditures include political payoffs and bailouts to support the special interests of politicians and bureaucrats.

But Wait, It Gets Worse

As written, the newly passed legislation is filled with so much waste analysts believe it will shrink the U.S. economy into the future:

Scholars at the University of Pennsylvania’s Wharton School of Business analyzed the plan and found that the massive spending splurge—which costs roughly $13,260 per federal taxpayer—would only cause a “slight uptick” in economic growth in 2021. The analysts warned that this minor boost would just be “instant gratification,” and that the skyrocketing government debt caused by the blowout legislation would undermine any gains in the medium-to-long term.

“The existence of the debt saps the rest of the economy,” Wharton analyst Efraim Berkovich said. “When the government is running budget deficits, the money that could have gone to productive investment is redirected.”

“Effectively, what we’re doing is taking money from [some] people and giving it to other people for consumption purposes,” he continued. “That has value for social safety nets and redistributive benefits, but longer-term, you’re taking away from the capital that we need to grow our economy in the future.”

What Berkovich describes is the outcome of the failure of fiscal discipline by President Biden and the leaders of the U.S. Congress. Ordinary Americans will ultimately pay the price for their shared failings.

The post The $1.9 Trillion “Rescue” Plan May Cause Small Uptick in the Short Term, but Will Only Add to Future Economic Growth Woes appeared first on The Beacon.

It’s actually Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, in a New York Times op-ed co-authored with Michael T. Osterholm of the University of Minnesota, who holds a PhD in environmental health and an MPH in epidemiology. A previous version of this commentary failed to mention Osterholm, and this author regrets the oversight. In any case, the pair are certain that woe is upon us and another hard lockdown will put the nation aright.

According to the Federal Reserve, Kashkari earned degrees in mechanical engineering from the University of Illinois and an MBA from the Wharton School. From 2006-2009, Kashkari served in the U.S. Department of the Treasury as senior advisor to Secretary Henry Paulson and then as assistant secretary of the Treasury. In that role, he established and led the Office of Financial Stability and oversaw the Troubled Assets Relief Program (TARP) for both Presidents George W. Bush and Barack Obama.

In 2008, People magazine named Kashkari as one of the sexiest men alive. In 2014 he told Peter Hamby of CNN, “I play to win at everything I do,” and that year he ran unsuccessfully for governor of California.

The joint New York Times op-ed charts financial instability deriving from the current crisis. “This pandemic is deeply unfair,” Kashkari and Osterholm write. “Millions of low-wage, front-line service workers have lost their jobs or been put in harm’s way, while most higher-wage, white-collar workers have been spared.” And looking ahead, “there won’t be a robust economic recovery until we get control of the virus.”

[This post contains revisions to the original version.]

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