Politicians & Central Bankers Need To Get On The Same Page
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To investors, Monetary policy is thought to be the work of a central bank. The economists and bankers spend an inordinate amount of time sifting through mountains of data to understand what is happening in an economy, while simultaneously hoping to make decisions today that can have a predicted, positive impact tomorrow. The job is nearly impossible. But central bankers don’t operate in a silo. They are part of a larger economy that has many moving parts. Take politicians as an example — fiscal policy decisions can have a profound impact on the economy, regardless of what happens with monetary policy. This requires the central bank to hit a moving target at all times. Their difficult job gets even more difficult. During the 2020 pandemic, the politicians and central bankers were on the same page. The central bank was cutting interest rates and perfecting the quantitative easing playbook. Politicians were dropping fiscal stimulus packages left and right. Cheap money was flowing through the system in a way that would make any Keynesian proud. Financial markets responded exactly how you would expect — asset prices rose aggressively, the liquidity crisis was mitigated, and inflation took off. This is the beauty of politicians and central bankers being in lock-step with each other, even if it led to the punishment of millions of savers across the country. The party ended at the end of 2021 though. The Federal Reserve realized that the market became too frothy and someone needed to take the drinks away at the party. Within months, the central bank began increasing interest rates at the fastest pace in history and eventually reached more than 5%. There was only one problem — the politicians never got the memo. Our elected leaders continued to pass legislation that flooded the system with money. There was the Infrastructure Investment and Jobs Act, the CHIPS and Science Act of 2022, and hundreds of billions of dollars to support proxy wars around the world. At the same time that the central bank was trying to tighten monetary conditions, the politicians were playing loose and fast with money. Central bankers have an even harder job when they are not on the same page as the politicians. But the story is not over yet. Recently, politicians like Senator Elizabeth Warren have begun publicly calling for the Federal Reserve to drop interest rates. She and three other Senators wrote in a letter:
This is an interesting development because the Senators are not wrong. High interest rates are definitely contributing to unaffordable housing. But that is not the only culprit. The immense fiscal spending that politicians have been doing for the last 15 years is also a significant component. This letter also raises the question of whether politicians should be attempting to influence the central bank’s decisions. Both sides of the political aisle have been doing this for years, but it doesn’t make it right. President Trump used to publicly tweet his opinion on what the central bank should do related to the strength of the dollar. President Biden has called Fed Chairman Jerome Powell into this office like a principal disciplining a student. Now these Senators are openly directing the Fed to take a specific stance on monetary policy decisions. If we want the central bank to be independent, which is how the organization is supposed to operate, then it is inappropriate for any politician to openly try to influence the decisions. Thankfully, I doubt the central bank pays much attention to what the politicians are asking for, but we are all human and anything is possible. Lastly, these complexities related to human decision-making and monetary policy are highlighted when you compare it to the software-driven monetary policy of an asset like bitcoin. The former system is subject to human error, but the latter can’t be changed regardless of what is happening in the world. Maybe there is a lesson in that comparison. Either way, the politicians and central bankers are on different pages right now. That makes the central bankers’ job more difficult. And the big losers in the situation are the American people. Hopefully that will change soon, but I won’t hold my breath. Have a great day. I’ll talk to everyone tomorrow. -Anthony Pompliano Hany Rashwan is the Co-Founder & CEO of 21Shares. In this conversation, we talk about the bitcoin ETF, historical bull markets, tokenization, institutional interest vs retail, regulation, altcoin ETFs, and more. Listen on iTunes: Click here Listen on Spotify: Click here Wall Street Will FOMO Into Bitcoin - Conversation with Hany RashwanPodcast Sponsors
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