{"id":2030307,"date":"2023-09-13T09:38:00","date_gmt":"2023-09-13T13:38:00","guid":{"rendered":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/how-the-fed-became-the-800-pound-gorilla-in-private-financial-markets\/"},"modified":"2023-09-13T09:45:08","modified_gmt":"2023-09-13T13:45:08","slug":"how-the-fed-became-the-800-pound-gorilla-in-private-financial-markets","status":"publish","type":"post","link":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/how-the-fed-became-the-800-pound-gorilla-in-private-financial-markets\/","title":{"rendered":"The Fed&#8217;s Dominance in Private Financial Markets"},"content":{"rendered":"<aside class=\"mashsb-container mashsb-main mashsb-stretched\"><div class=\"mashsb-box\"><div class=\"mashsb-count mash-medium\" style=\"&quot;\"><div class=\"counts mashsbcount\">14<\/div><span class=\"mashsb-sharetext\">SHARES<\/span><\/div><div class=\"mashsb-buttons\"><a class=\"mashicon-facebook mash-medium mash-nomargin mashsb-noshadow\" href=\"https:\/\/www.facebook.com\/sharer.php?u=https%3A%2F%2Fwww.conservativenewsdaily.net%2Fbreaking-news%2Fhow-the-fed-became-the-800-pound-gorilla-in-private-financial-markets%2F\" target=\"_top\" rel=\"nofollow\"><span class=\"icon\"><\/span><span class=\"text\">Facebook<\/span><\/a><a class=\"mashicon-twitter mash-medium mash-nomargin mashsb-noshadow\" href=\"https:\/\/twitter.com\/intent\/tweet?text=&amp;url=https:\/\/www.conservativenewsdaily.net\/breaking-news\/?p=2030307&amp;via=ConservNewsDly\" target=\"_top\" rel=\"nofollow\"><span class=\"icon\"><\/span><span class=\"text\">Twitter<\/span><\/a><a class=\"mashicon-subscribe mash-medium mash-nomargin mashsb-noshadow\" href=\"#\" target=\"_top\" rel=\"nofollow\"><span class=\"icon\"><\/span><span class=\"text\">Subscribe<\/span><\/a><div class=\"onoffswitch2 mash-medium mashsb-noshadow\" style=\"display:none\"><\/div><\/div>\n            <\/div>\n                <div style=\"clear:both\"><\/div><\/aside>\n            <!-- Share buttons by mashshare.net - Version: 4.0.47--><div data-post-content=\"true\" class=\"post_content\" id=\"post_content\">\n<p>As the Federal Reserve comes to a crossroads \u200cin \u200bits campaign to extinguish historically high inflation rates, Jerome Powell, its chairman, said that America\u2019s central bank was \u201csteering by the \u200dstars on a cloudy night.\u201d<\/p>\n<div class=\"my-5\">\n<p>According to\u200b some economists, one obstacle obscuring the Fed\u2019s view \u2064is the federal government itself. As the state extends its authority ever deeper into private markets, it is not only \u200bdrowning out the information the Fed needs to set policies, \u2064it also is acting as a material drag on \u2062America\u2019s ability to produce, \u200bregardless of how many trillions of dollars the Fed pumps into the \u200beconomy.<\/p>\n<\/p><\/div>\n<p>\u201cThe dramatic expansion in \u2063government reflects the secular decline of the \u2064dollar\u2062 and the U.S. economy,\u201d Arthur Laffer, former economic \u200dadvisor \u200bto presidents Ronald Reagan and Donald Trump, told The Epoch Times. \u200c\u201cIf the Fed saw the decline for what it is, it would be the first step to recovery.\u201d<\/p>\n<div class=\"shortcode\">\n<div class=\"border-comp-divider mb-4 mr-4 w-full max-w-[500px] border px-5 py-4 text-[16px] leading-[20px] text-[#262626] md:float-left\" id=\"in_article_related_stories\">\n<div class=\"mb-3 font-sans text-[16px] font-semibold uppercase leading-[19px] text-[#2F2F2F]\">Related Stories<\/div>\n<div class=\"mb-4 flex gap-2\">\n<div class=\"grow\">\n<div class=\"mb-1 line-clamp-2\">\n            <a href=\"http:\/\/www.theepochtimes.com\/article\/federal-reserves-key-inflation-measure-jumps-incomes-slow-5484220\">Federal\u2062 Reserve&#8217;s \u2064Key Inflation\u200d Measure Jumps; Incomes \u200cSlow<\/a>\n          <\/div>\n<div class=\"text-comp-caption text-[14px] leading-[18px]\">8\/31\/2023<\/div>\n<\/p><\/div>\n<div class=\"shrink-0 basis-[120px]\">\n          <a href=\"http:\/\/www.theepochtimes.com\/article\/federal-reserves-key-inflation-measure-jumps-incomes-slow-5484220\"><\/a>\n        <\/div>\n<\/p><\/div>\n<div class=\"mb-4 flex gap-2\">\n<div class=\"grow\">\n<div class=\"mb-1 line-clamp-2\">\n            <a href=\"http:\/\/www.theepochtimes.com\/epochtv\/federal-reserve-chair-powell-speaks-on-economic-outlook-at-economic-symposium-5480173\">Federal \u200bReserve Chair Powell Speaks on Economic\u200b Outlook at Economic Symposium<\/a>\n          <\/div>\n<div class=\"text-comp-caption text-[14px] leading-[18px]\">8\/25\/2023<\/div>\n<\/p><\/div>\n<div class=\"shrink-0 basis-[120px]\">\n          <a href=\"http:\/\/www.theepochtimes.com\/epochtv\/federal-reserve-chair-powell-speaks-on-economic-outlook-at-economic-symposium-5480173\"><\/a>\n        <\/div>\n<\/p><\/div>\n<\/p><\/div>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>To see examples of this, the Fed need look no farther than its own\u200c home turf:\u200b the market \u2063for <a href=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/japans-core-inflation-eases-bolstering-view-boj-will-stand-pat\/\" title=\"Japan's core inflation eases, supporting the belief that the BOJ will maintain its current stance.\">short-term interest\u200c rates<\/a>.<\/p>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>Short-term interest\u2064 rates,\u200b absent government intervention, should reflect an economy\u2019s supply\u200b and demand for loans and \u2062credit at any given time. Economists denote this\u2064 hypothetical rate as R* (&#8220;R star&#8221;), \u200bor the \u201cneutral rate.\u201d<\/p>\n<\/p><\/div>\n<p>\u201cWe don\u2019t \u200bobserve the neutral rate \u200cin the real world because the Fed is interfering with\u2063 the market,\u201d Thomas Hogan, \u200d<a href=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/five-hidden-costs-of-inflation\/\" title=\"Five Hidden Costs of Inflation\">senior research faculty<\/a> at American Institute for Economic Research and former chief economist for the U.S. \u200cSenate Banking Committee, told The Epoch Times. \u201cPowell is making a pun here, that because we don\u2019t \u200dobserve\u2063 the neutral rate in the real world, we can\u2019t see \u200c\u2018R-star.\u2019<\/p>\n<div class=\"shortcode post-related-videos\">\n<div class=\"lazyload-wrapper\">\n<div class=\"lazyload-placeholder\"><\/div>\n<\/p><\/div>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>\u201cThe Fed\u2062 is now so involved with financial markets that they are distorting the market and\u2064 making it\u200c difficult for the market to operate,\u200b but\u200c also difficult for them to\u200c get good signals from financial markets about the effects of their own policies,\u201d Mr. Hogan said. \u201cThe Fed is playing such a large role in those markets that it\u2019s difficult to tell what the market rate would\u2063 be if the Fed weren\u2019t interfering.\u201d<\/p>\n<h3>Crowding Out the Private Sector<\/h3>\n<p>One of the markets for <a href=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/carnival-cruises-might-move-home-ports-out-of-u-s-due-to-covid-19-restrictions\/\" title=\"Carnival Cruises Might Move Home Ports Out Of U.S. Due To COVID-19 Restrictions\">short-term investments<\/a> is the reverse-repo \u2064market. The Fed was a minor player in this market until 2021 when its participation\u2063 spiked from a few billion dollars, \u2064to more than $2 trillion.<\/p>\n<\/p><\/div>\n<div class=\"post-figure\">\n<figure style=\"width:600px\" class=\"alignnone\"><figcaption>(Source: Federal Reserve \/ Fed&#8217;s participation in the \u2062reverse-repo \u200bmarket, a short-term \u2062credit market)<\/figcaption><\/figure>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>Prices and rates\u2062 in this market had previously been set \u200dvia arm&#8217;s-length trading by numerous \u2064counterparties. Over \u2063the past two years, however, the Fed grew from being a minor player to dominating more than 80 percent of the market.<\/p>\n<\/p><\/div>\n<div class=\"post-figure\">\n<figure style=\"width:600px\" class=\"alignnone\"><figcaption>(Source: U.S. Securities and Exchange Commission; data assembled by Stefan A. Jacewitz, Federal Reserve \/ Crowding out the\u200c competition: the \u2063share of the Treasury repo market held by the Fed has increased dramatically since 2021 )<\/figcaption><\/figure>\n<\/p><\/div>\n<p>A January report by the Atlantic Council stated that \u201cthe persistently\u2064 huge\u200b footprint of \u2062the Fed in \u2062<a href=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/how-the-fed-became-the-800-pound-gorilla-in-private-financial-markets\/\" title=\"The Fed's Dominance in Private Financial Markets\">private short-term financial transactions \u2026 reflects<\/a> the preference of financial institutions and other companies to deal with the Fed rather than conducting businesses\u2064 among themselves. This is an unhealthy development \u2064with largely negative implications for\u2064 the U.S. financial \u200csystem and economy going forward.<\/p>\n<div class=\"my-5\">\n<p>\u201cIf these trends \u2063continue, they will marginalize the role of private markets for short-term funds, weakening the usefulness of market \u2062price signals arising through the autonomous supply\u200c and demand for funds,\u201d\u200c the report\u200c stated.<\/p>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>The Fed \u2064was created to be a lender of\u200d last resort \u2063to America\u2019s banks and \u2064to set monetary policy; its mission\u2064 is to \u2062keep inflation and unemployment within an acceptable range. Starting in 2008,\u2064 however, \u200dthe Fed took on the new role of \u2063implementing an experimental policy called \u201cquantitative \u200beasing\u201d (QE).<\/p>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>The Fed embarked on \u200bthis policy at a time when they had driven interest rates to \u200dzero, but the economy remained sluggish. Under QE,\u2063 the Fed created trillions of dollars, which it used \u200bto buy\u2062 Treasury bonds, mortgage-backed\u200b bonds, and other securities from banks, on the theory that\u200d flooding the economy with dollars would compel\u2063 new spending,\u200c lending and investment, despite the risk of inflation.<\/p>\n<\/p><\/div>\n<div class=\"post-figure\">\n<figure style=\"width:600px\" class=\"alignnone\"><figcaption>(Source: Federal Reserve \/ The Fed&#8217;s balance \u2064sheet,\u2062 as \u2063its investments \u200bexpanded from $800 billion before 2008 to $9 trillion in 2021\u200d under quantitative easing; shaded gray\u2063 areas\u200b indicate recession)<\/figcaption><\/figure>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>Under QE, the Fed transformed itself from lender of\u2062 last resort into \u200bone of the world\u2019s largest investment funds. In 2020, it\u200d launched a second major asset\u2063 purchase program in response to government pandemic lockdowns, and its holdings ballooned to $9 trillion.<\/p>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>Though America\u2019s central bank has thus far been limited, for the\u200d most part,\u200d to buying government-issued bonds, it nonetheless moved closer\u200c to other \u200bcountries\u2019 central banks like \u2064the Bank of \u2063Japan, which is currently the largest \u2062single owner of shares\u200b in Japanese companies.<\/p>\n<h3>Printing Money<\/h3>\n<p>Central\u2063 banks \u200dare unique among financial institutions, \u200din \u2063that they can create money virtually without limit whenever they want to go on a buying spree. And although the \u2064Fed&#8217;s expansion was justified as\u2062 a way to rescue the \u2062U.S. economy from recession, its balance \u2064sheet never returned to previous levels \u2063when the recessions \u2064passed.<\/p>\n<\/p><\/div>\n<p>For all the government spending, living standards fell \u200dfor the middle\u2064 class and the poor. \u200bAnd growth rates fell, \u2063as well.<\/p>\n<div class=\"my-5\">\n<p>The U.S. economy averaged GDP growth rates of 3.1 percent,\u200d net of inflation, since World War II. However, \u2064during the \u206215 years since QE was put into effect, growth rates net of inflation have been cut \u2063in half, averaging\u2063 a mere 1.6 percent.<\/p>\n<\/p><\/div>\n<p>\u201cThe Fed is mostly concentrated on <a href=\"https:\/\/www.conservativenewsdaily.net\/breaking-news\/consumer-confidence-dragged-down-as-bidenflation-and-omicron-crush-hope\/\" title=\"Consumer Confidence Dragged Down As Bidenflation and Omicron Crush Hope\">short-term growth<\/a>, \u200cbut\u2063 in\u200b the long term, creating more money can \u200bonly create more inflation,\u201d\u2064 Mr. \u200cHogan said. \u201cThe longer-term\u2062 problems have \u200cbeen getting\u2064 worse, in terms of regulation, in\u2062 terms of government\u2064 spending, in terms of interference in the economy, and the Fed \u200bis actually\u2062 doing a lot of things to \u200bmake\u2064 those problems worse.\u201d<\/p>\n<div class=\"my-5\">\n<p>In addition to \u2062the drag on growth and inflation, quantitative easing\u2063 risked other unintended consequences.\u2063 One of these is what is called the \u201callocative\u2062 effect.\u201d<\/p>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>This is the incentive or compulsion, during low-interest periods, for\u2064 investors \u200cto allocate funds toward riskier\u200d ventures that would pay a higher return, versus safer assets that were once\u2063 the \u2063norm but now yielded almost nothing. Savers\u200b could not afford to sit in cash, munis or treasuries because they would just lose money to inflation.<\/p>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>The allocative effect led to a series of asset bubbles\u2014in housing, stocks, cryptocurrencies, etc.\u2014as investors chased yield. In addition to price inflation, asset\u200d inflation has become a chronic feature of America\u2019s \u2062economy.<\/p>\n<\/p><\/div>\n<div class=\"my-5\">\n<p>Another side-effect was\u2064 something called the <a href=\"https:\/\/www.swfinstitute.org\/news\/89070\/what-is-the-cantillon-effect-and-why-its-even-more-important-now\" target=\"_blank\" rel=\"noopener\">Cantillon effect<\/a>, which in short means\u2062 the first ones to get the money get rich. In this<\/p>\n<\/p><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>As the Fed battles high inflation, Chairman Jerome Powell compares their strategy to navigating on a cloudy night. Economists believe the federal government is hindering their progress, as its authority expands.<\/p>\n","protected":false},"author":887,"featured_media":2030308,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","fifu_image_url":"https:\/\/cndimages.nyc3.digitaloceanspaces.com\/breaking-news\/wp-content\/uploads\/2021\/01\/IMG_2758-scaled-1.jpg","fifu_image_alt":"","footnotes":""},"categories":[543],"tags":[],"class_list":["post-2030307","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-the-epoch-times"],"fifu_image_url":"https:\/\/cndimages.nyc3.digitaloceanspaces.com\/breaking-news\/wp-content\/uploads\/2021\/01\/IMG_2758-scaled-1.jpg","_links":{"self":[{"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/posts\/2030307","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/users\/887"}],"replies":[{"embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/comments?post=2030307"}],"version-history":[{"count":0,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/posts\/2030307\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/media\/2030308"}],"wp:attachment":[{"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/media?parent=2030307"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/categories?post=2030307"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.conservativenewsdaily.net\/breaking-news\/wp-json\/wp\/v2\/tags?post=2030307"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}