The Federal Reserve’s Growing Credibility Crisis; The Debt Ceiling Solution

Insights and Market Perspectives

Author: Greg Valliere

October 5, 2021

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The Federal Reserve’s Growing Credibility Crisis;
What’s the Debt Ceiling Solution?
October 5, 2021
THE FEDERAL RESERVE, long known as apolitical, faces a serious credibility crisis as inflation surges and Chairman Jerome Powell’s critics become more vocal. They’re asking, bluntly, whether it’s time to clean house at the Fed.

AFTER TWO REGIONAL BANK PRESIDENTS were forced out last month for active trading, there was hope among Fed supporters (like us) that the public relations damage could be contained. That was shattered in recent days when it was disclosed that Vice Chairman Richard Clarida traded between $1 million and $5 million in early 2020, shifting bond investments to a stock fund.

THE FOLLOWING DAY, Chairman Powell announced that the Fed would take action to support the economy if the pandemic threatened economic growth.

THIS HAS EMBOLDENED SEN. ELIZABETH WARREN, who wants Powell out. The embattled Fed chairman, who insisted this summer that inflation was transitory, has policy critics — but his bigger headache is the lax internal supervision over active traders within the bank. An internal Fed watchdog has begun an investigation of the trading.

POWELL’S CHANCES OF ANOTHER TERM aren’t much better than 50-50, a stunning slide after he was considered a shoo-in earlier this year.

NAMES OF POTENTIAL SUCCESSORS have always included dovish Gov. Lael Brainard, but there are other candidates, including Atlanta Fed President Raphael Bostic, who could become the first African-American and openly gay Fed Chairman. Both Brainard and Bostic would be more aggressive bank regulators than Powell.

PRESIDENT BIDEN NEEDS ALL THE SUPPORT HE CAN GET, as his agenda sputters. So he needs to keep the fiery progressive Warren happy. Warren urged a SEC probe yesterday, and stated that “it is not clear why Chair Powell did not stop these activities, which corrode the trust and effectiveness of the Fed.”
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DEBT CEILING — THE MOST LIKELY PATH: Chuck Schumer probably will lose another debt ceiling vote in the Senate tomorrow; he’s still trying to pin blame for the crisis on Mitch McConnell. But that tactic hasn’t worked, so the Democrats may be forced to use the complicated budget reconciliation process to approve a debt ceiling increase.

THERE ARE LONGSHOTS, such as minting a $1 trillion coin (or several coins) that would pay off debts, but these don’t pass the smell test. A reconciliation path, which McConnell wants, is the most logical move — but it’s a time-consuming process, likely to take weeks. Unfortunately, there aren’t weeks left before a default crisis could arrive.

IS OCTOBER 18 THE REAL DROP-DEAD DATE? It could come a little later, in early November — but if Congress dithers, a sense of crisis later this month may push the reeling Fed into taking very controversial emergency measures to keep bonds from defaulting.

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AN OUTRAGEOUS IRS POWER GRAB: We don’t always agree with the Wall Street Journal’s editorials, but your blood pressure will rise after reading today’s screed, titled “The IRS Wants to Look at Your Bank Account.”

IRS OFFICIALS and many Democrats, eager to stop tax avoidance, apparently want to review every account above a $600 balance, or with more than $600 of transactions in a year. That would affect virtually everyone — and could become an explosive election issue next year.