As Americans struggle to pay their bills amid soaring inflation, the institutions we rely on to bring the economy back to stability are engaged in a covert power struggle that only worsens the impending crisis.
Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen are locked in a tug of war over interest rates, sources say.
Sitting on Yellen’s side are liberal Fed members, including ambitious climate-obsessed Federal Reserve Governor Lael Brainard, who led the progressives’ stealth takeover of the board over the past of the past year.
While Powell is determined to bring inflation down by raising interest rates, as central bankers around the world have traditionally done, sources say Yellen has thwarted his efforts with the help of progressive ‘doves’ from the Federal Reserve, who are advising reporters that there could be a slowdown in rate hikes, setting the market on a rollercoaster ride.
“As Powell raises rates, Yellen is considering buying up Treasuries,” says Brent Johnson, CEO of Santiago Capital, who understands the Fed’s internal dynamics.
“It could thwart Powell’s efforts and potentially boost inflation.”
The market rally goes against Powell’s efforts to fight inflation. But the tussle ensured the stock market did not crash before midterms, giving voters the impression that the economy is healthy, delaying corporate layoffs and keeping stock prices on the rise. rise.
This unusual power struggle between the Fed and the Treasury looks set to continue, delaying — and likely exacerbating — the economy’s inevitable hard landing, Johnson says.
“Powell has been very, very clear in what he says, that he wants to raise interest rates and slow down the economy. He says it’s not going to be a soft landing, that it may take a recession to slow inflation.
“So when Powell raises interest rates, he doesn’t want the market to hit all-time highs.
“Where it gets tricky or divisive is because not everyone who works at the Federal Reserve likes themselves [and] some members are more hawkish than others.
Hawkish in this context means adhering to the traditional Powell view that interest rates must rise to fight runaway inflation, even if it means a stock market crash and a short, sharp recession,” he said. he declares.
The doves, which include Yellen, liberal members of the Federal Reserve and the Biden administration, believe they can avoid a recession for a year or two — possibly until after the 2024 election.
The administration “would prefer a soft landing to a hard landing,” Johnson said.
“I don’t think it’s possible.
“Powell says it’s highly unlikely we’ll get a soft landing.
“But that’s what Yellen and Brainard are determined to do.
“Essentially, I believe Republicans would love a crisis leading up to the election and Democrats would love to hit the box on the road.
“I think what Powell wants is to end the recession and get the economy back quickly, and Brainard and Yellen are more inclined to kick him down the road.”
Albert Marko, a policy consultant for the financial industry, also with deep knowledge of Fed dynamics, describes internal opposition to Powell as “financial weaponization against the GOP.”
“It’s really unique where Yellen. . . can drive the dollar up and markets down at will while accusing Republicans of blocking legislation for the next two years.
Brainard is being mooted in Washington as a potential replacement for Yellen, 76, and was reportedly in line for Powell’s job before Biden reappointed him last year for another four years.
Marko says his allies are founding journalists, “contradicting what Powell has said in previous meetings. . . triggering buying sprees in the market that [anticipates] a slowdown in rate hikes . . .
“From the public’s perception, their home prices are up, their stocks are down only slightly, and businesses are still operating normally, but that’s just window dressing by an artificially high market.”
The Federal Reserve approved a fourth straight three-quarter percentage point rate hike earlier this month and Powell has been very clear about his determination to continue.
“It is premature to discuss a break [interest rate hikes]and it’s not something we think about,” he said.
“Nobody knows if there is going to be a recession or not, and if so, how bad that recession would be.”
It’s a delicate balance, with history suggesting that Powell’s tough medicine is a necessary fix to get the economy back on track.
But it makes the job harder to have politicized Polyannas behind the scenes by pulling in the opposite direction.
“Even if the Fed and the Treasury were working hand in hand and everyone agreed, even then the problems are insurmountable,” Johnson says.
“But fiefdoms, factions and infighting only exacerbate the problems.”
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