The Federal Open Market Committee (FOMC) released its latest monetary policy statement. The Fed hiked its target rate by 25 basis points (0.25%), as was widely expected.

We were reassured from the statement that the U.S. banking system continues to be “sound and resilient”. It will be sound and resilient until it isn’t.

It is bad economic theory when Jerome Powell insinuates that wages need to be forced down in order to control inflation. Falling wages may result from the Fed hiking rates and draining its balance sheet, but that is just a consequence. Making wages fall doesn’t automatically mean we get less inflation.

Of course, wages have been going down in real (inflation-adjusted) terms. They have been rising nominally, but at a slower pace than price inflation. This means that most families are experiencing a decline in living standards.

This is all because of massive government spending, government regulation, and previous monetary inflation. The only reason we are facing price inflation problems now is because the Fed was willing to create massive amounts of money and fund deficits at low rates in previous years.

A Soft Landing?

Powell was asked about a “soft landing” for the economy. Of course, no Fed chairman will ever say that a big recession is imminent. Powell pretends that the experts at the Fed are managing the economy well and hope to get inflation under control without seeing a massive slowdown.

Why should we think that this time is any different? If it is any different at all, it is because it is far worse than other times in the past. The price inflation may not be as bad as the 1970s, but the major asset bubbles are likely worse.

The Fed is continuing to hike rates in the face of a heavily inverted yield curve. And they are leaving the door open for another rate hike later this year if the economy doesn’t completely implode before then.

I know that Powell is something of a Keynesian and believes in centrally planning the economy, but I don’t think he’s completely stupid either. He must understand that a bad recession is likely on the horizon. He just has to pretend like everything is ok.

Maybe the Fed Really is Independent

It is something of a joke that the Fed always claims independence. Fed officials will say they shouldn’t be audited and should have minimal, if any, oversight because it would ruin their independence.

This is just an excuse to maintain power and to maintain the status quo.

With that said, I also don’t buy into the argument that is often made by Fed critics that the Fed is really working for the president or for the Democrats. Maybe they are working for the big banks, but I think it is hard to claim that Jerome Powell is working on behalf of Biden and company.

Maybe the Fed is just part of the establishment, which makes sense in that they want to somewhat maintain the status quo. But the establishment is not always working in complete unison.

The Fed is obviously doing what needs to be done to save the dollar. If they lose control of the dollar, then the whole establishment probably loses.

But with the rate of price inflation coming down, the Fed could at least stop hiking rates at this point. By continuing to tighten its monetary policy in the face of an inverted yield curve, they are risking a recession for the ages, and it would start before the November 2024 election.

Therefore, I think this does away with any theory that the Fed is there to help the president or the Democrats. We have a Democrat president, and Jerome Powell and company seem to have no problem bringing on a recession heading right into the next election.

It will be one more factor that will make presidential politics really interesting in the next year and a half.