Fire the entire Fed, not just Lisa Cook

President Donald Trump fired Fed Governor Lisa Cook on Monday due to allogations of mortgage fraud. I say, while he is at it, he should also fire Fed Chair Jerome Powell and the rest of the merry band of money printers immediately due to gross incompetence. But Trump should not dump Powell because he is chronically too late to cut interest rates, as the President avers. Rather, he should do so because our current Fed Head is the biggest counterfeiter the US has ever suffered.

In fact, his willingness to create a massive amount of new credit is not only unprecedented, it is downright depraved. Since his tenure began as Fed Chair in February 2018, he has overseen a 104% increase in the size of the Fed's balance sheet, which means he created $4.6 trillion of credit out of thin air in just four years to manipulate the prices of Treasuries and mortgage-related bonds. He was still in the process of buying mortgage-backed securities up until the spring of 2022, even after home prices had already surged by more than 30% over the previous 2 years.

And now, despite trend GDP growth, full employment, record-tight credit spreads, extremely easy financial conditions, record-high stock values, a cost of living that has wiped out most of the middle class, and the lowest home owner affordability on record, the Fed thinks now is a good time to start another round of money printing!

Powell gave his annual Jackson Hole speech on August 22^nd, where he suddenly became spooked about the weakening labor market and abruptly grew confident that inflation was no longer an issue. He said, “…with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” He also said, “Given that the labor market is not particularly tight and faces downside risks, [a lasting inflation dynamic] does not seem likely.” Adding, “…downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”

This is quite a change from the Fed’s position just a few weeks earlier. At his last FOMC meeting and press conference given on July 30^th, he had this to say about the strength of the labor market:

“In the labor market, conditions have remained solid…The unemployment rate, at 4.1 percent, remains low and has stayed in a narrow range over the past year. Wage growth has continued to moderate while still outpacing inflation. Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment.”

That is a dramatic change of viewpoint in just a few weeks’ timeframe! Inflation has been above the Fed’s 2% target for the past 51 months, and inflation is rising further and faster away from that inflation goal. So then, why begin another rate-cutting cycle now? Both PPI and CPI have risen nearly 3% year-over-year. How is this providing stable prices? I understand that the BLS recently revised its Non-farm Payroll numbers lower. But still, even with these negative revisions, the unemployment rate is just 4.2%, which is unchanged y/y and historically very low. So why does the labor market data suddenly supersede the data on stubbornly high and rising rates of inflation?    

Nevertheless, the Fed seems determined to begin cutting borrowing costs for the overnight bank lending rate come September 17^th. The Administration wants rates to plunge by 150-175bps rather soon. Hence, the condition of our crumbling dollar will become worse.

However, borrowing costs are rising around the world despite the efforts of central bankers to lower short-term rates. This is happening in the context of sovereign nations that have been saddled with a massive increase in outstanding debt since the outbreak of the COVID pandemic in 2020.

Longer-duration debt is under pressure globally amid growing concern over widening fiscal deficits, with German 30-year yields rising to a 14-year high last week. Japan's 20-year bond is now yielding 2.67%, which has risen to the highest level in over 25 years. This is after trading near the zero percent range between 2016 thru 2020. And, Japan’s 30-year government bond yields have now climbed to a fresh record high of 3.23%, as concerns over sticky inflation and rising debt caused traders to demand higher rates. This is terrible news for a nation with a debt-to-GDP ratio of 260%. In addition, the yield on the UK 30-year Gilt recently jumped above 5.6%, which is the highest level since 1998.

Inflation and insolvency are causing yields to spike, which will serve as the catalyst for the next financial crisis. That crisis will be met with an attempt by central banks to take control over the bond market on both the short end long end. Yield curve control occurs when central banks vow to print an unlimited amount of money to purchase long-term bonds for the purpose of capping those yields.

Powell's Jackson Hole speech sent interest rates on the short end of the yield curve plunging. However, and this is crucial, rates on the long end barely budged--they did not decline commensurately with T-Bills and shorter-duration Notes.

This is the same thing that happened when the Fed began cutting rates by 100bps last fall, and the 10-year rose by one percent. Powell began cutting rates in September 2024, when the headline CPI was up 2.4% year-over-year. The latest CPI reading for July was up 2.7% year-over-year. This should give traders even more conviction that long-term interest rates will rise rather than fall when the Fed cuts the F.F.R. in a few weeks’ time. What else would you expect to occur when a central bank floods the money markets with more credit, even though inflation remains elevated, economic growth is not yet contracting, and the nation is flirting with insolvency?

If Powell lowers the Fed Funds Rate and the Benchmark lending rate rises nonetheless, mortgage rates and corporate borrowing costs will also rise. And that will most likely torpedo the real estate and equity bubbles on which our overleveraged economy is precariously perched.

By the way, Powell should not be excessively pilloried for getting interest rates consistently wrong. Sure, it is true that he has an extraordinary proclivity to wreck the dollar, which is only matched by his hubris in thinking he knows what r-star is, or what the neutral real interest rate is at all times. After all, there is no cabal of autocrats that can calculate what the real cost of money should be. That rate should only be determined by millions of individuals making lending and borrowing decisions based on the supply of savings vs. the demand for credit. The growth rate of the base money supply should be fettered by tying it to the new mine supply of gold. Or alternatively, cap it to trend growth of GDP (labor force growth + productivity growth), which is around 2%. And then, make sure the banking system does not run amok and abuse the fractional reserve system. This can be done by imposing tight limits on the ratio between a bank’s assets and the base money supply. Doing this would eliminate inflationary bubbles and allow the Fed to be relegated to the trash bin of history, where it belongs.

Unless and until that comes to fruition, we will be forced to undergo cycles when there is a plenary collapse of the financial system. The potential energy behind the biggest meltdown in US history is already in place.