The Fed: Searching for Credibility

Fed watchers are reckoning that, by raising the policy interest rate a quarter-point, the central bank and its chairman, Kevin Warsh, “passed the credibility test.” The unanimous vote of the Open Market Committee caps weeks of speculation in the press over the commitment of the Fed, and its chairman, to fighting inflation. Yet the challenges facing the central bank suggest it is premature to conclude that doubts over the Fed’s credibility are settled. The Fed’s decision runs contrary to President Trump’s fulminations. “Interest Rates in the United States should be 1 percent, or less, because we are the Best Credit in the World — BY FAR,” he thundered on Truth Social. The head of the National Economic Council, Kevin Hassett, had earlier urged the Fed to avoid a “rate hike” in the leadup to the midterms. “An independent Fed,” he said, “stays out of the way of elections.”Yet a former Fed vice chairman, Roger Ferguson, had argued that “everything is pointing in the direction of September as a time to move if Warsh and his colleagues are going to maintain credibility.” A former Fed economist, Claudia Sahm, opined at Bloomberg that “credibility lives in what people believe the central bank will do under pressure.” She argued that it is “precisely when the pressure is greatest that the Fed’s credibility is won or lost.”It’s hard to gainsay the merit of a renewed effort by the Fed to get inflation down, especially since, as the Times is reporting today, consumer prices have surged some 30 percent since just 2019. The elevated prices are at the heart of American frustrations over affordability. The stubbornness of these higher prices is due in part to our fiat money system, in which prices ratchet ever higher without, as consumers would prefer, falling back.The persistence of high prices is bound up with the question of the Fed’s credibility. Both dilemmas stem from the nature of America’s money. The dollar was once defined in gold, the convertibility of which the Fed was created to steward. Yet since 1971, America has been under a fiat money system that cut the historic ties with the basis of real value, gold. It’s hardly a coincidence that as prices have surged, the dollar’s value, as measured in gold, is near historic lows.When Nixon ended Bretton Woods, the dollar was redeemable at a 35th of a gold ounce. Today it fetches barely a 4,300th of an ounce. The dollar’s value in terms of gold has been improving since January, when it was fetching less than a 5,500th of a gold ounce. The improvement was traced by some to Mr. Warsh’s accession as chairman and to his stern talk on inflation. Today’s vote to raise interest rates to a degree vindicates that appraisal.Even if the Fed’s rate increase serves to help bring inflation down to the 2 percent target, the elevation in consumer prices shows no sign of reversing, say, to the levels of 2019. Progress on that head would require reforming the fiat money system itself. Reviving an honest dollar, after all, would have to restore the fiscal discipline that the requirement of gold convertibility originally imposed on the federal government and our central bank. Which brings us back to Mr. Warsh and the Fed, which is grappling with challenges like its swollen balance sheet and concerns about the bank’s technical solvency. “I was not waiting breathlessly on any particular data,” Mr. Warsh said today of the rationale for the rate rise. Yet it’s hard to imagine a central banker of his caliber ignoring the dollar’s gold value, which has long served as the best measure of the currency’s soundness and by extension the Fed’s credibility.

The Fed: Searching for Credibility

The Fed: Searching for Credibility

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