The Fed is trying to slow down economic activity, says Judy Shelton

Judy Shelton, a Senior Fellow at the Independent Institute, discusses the Federal Reserve's (the Fed) current monetary policy and its impact on the economy. She asserts that the Fed is attempting to slow down economic activity, which is at odds with the fiscal policy of the federal government and the Biden administration, who are investing heavily in large projects and creating jobs. Shelton explains that the Fed's restrictive monetary policy, which includes keeping interest rates high, is intended to curb demand and control inflation. However, this approach is challenged by the government's spending, which is increasing demand and potentially putting upward pressure on prices. She also touches on the Fed's decision-making, noting that Chair Powell has signaled a preference for cutting rates rather than maintaining the status quo, despite concerns about stagflation. Shelton's analysis suggests that the Fed's efforts to control the economy through monetary policy are complicated by the government's fiscal actions.

Takeaways

• 📉 The Federal Reserve (the Fed) is considering slowing down economic activity by potentially cutting rates.
• 💭 Chair Powell has shown a preference for rate cuts and has dismissed concerns about stagflation.
• 🔄 The situation has changed since December, with inflation having decreased significantly while growth remained steady, and unemployment was low.
• ❌ Talk of a rate cut now seems inappropriate given the current economic context.
• 🏛️ The Fed views the current rate as restrictive, especially for private lending, but it isn't deterring public borrowing.
• 💰 Fiscal policy, including big projects by the federal government and the Biden administration, is stimulating the economy, which contrasts with the Fed's restrictive monetary policy.
• 🔨 The government's spending on projects and job creation is putting pressure on prices, which could counteract the Fed's restrictive policy.
• 📈 The Fed's strategy involves raising interest rates, which can limit the availability of funds for banks to lend, affecting small businesses and potentially leading to job losses.
• 🚫 The restrictive monetary policy may not be effective in controlling inflation if fiscal policy is working at cross purposes.
• 🤔 Judy Shelton suggests that the Fed's actions may be contrary to what is needed to spur private sector growth and suggests a reevaluation of public sector spending.
• 🌐 The overall impact of the Fed's and the government's actions on the economy is complex and requires careful consideration of their combined effects.

Q & A

What is the main concern Judy Shelton expresses about the Federal Reserve's current approach?

Judy Shelton expresses concern that the Federal Reserve is trying to slow down economic activity, which she believes is at odds with the fiscal policy of the federal government and the Biden administration, who are actively spending on big projects and creating jobs.

What does Judy Shelton suggest about the Federal Reserve's preference for cutting rates?

Shelton suggests that the Federal Reserve, under Chair Powell, prefers to cut rates rather than stand pat, and that they are considering the current rate as restrictive, which could be making it harder for them to achieve their goals.

How does Judy Shelton describe the change in the Federal Reserve's outlook since December?

Shelton describes a significant shift since December, where the Federal Reserve was pleased with the dramatic decrease in inflation and low unemployment rates. Now, however, the talk of a cut seems inappropriate given the current economic conditions.

What does Judy Shelton believe about the current interest rate's impact on private lending?

Shelton believes that the current interest rate is restrictive in terms of private lending, but it is not holding back public borrowing, indicating a discrepancy in the effects of monetary policy.

How does Shelton view the relationship between fiscal policy and the Federal Reserve's monetary policy?

Shelton views the relationship as working at cross purposes, with fiscal policy (spending by the federal government and the Biden administration) increasing demand and potentially putting pressure on prices, while the Federal Reserve is attempting to slow down economic activity.

What is the implication of the Federal Reserve's decision to keep commercial banks' Fed deposit account rate at 5.4%?

The implication is that banks are less likely to make their money available elsewhere, including to their customers at a low rate, which could hinder small companies from getting loans, leading to shelved expansion plans and potential job losses.

What does Judy Shelton think about the Federal Reserve's ability to get ahead of the current economic situation?

Shelton doubts that restrictive monetary policy can get ahead of the situation, as it seems to be working in the opposite direction of what is needed to control the economic activity and price pressures.

How does Judy Shelton perceive the Federal Reserve's strategy in the context of the government's actions?

Shelton perceives the Federal Reserve's strategy as being at odds with the government's actions. While the Fed is trying to slow down economic activity, the government is investing in projects that stimulate the economy and job creation.

What does Judy Shelton suggest is the Fed's deliberate plan regarding economic activity?

Shelton suggests that the Fed's deliberate plan is to slow down economic activity by making it more restrictive for banks to lend, which in turn could lead to reduced expansion and hiring by businesses.

What is the issue Judy Shelton raises regarding the Federal Reserve's approach to private and public sectors?

Shelton raises the issue that the Federal Reserve's approach may be having the opposite effect of what is intended. While they may want to spur private sector growth, their actions could be inadvertently hurting it and instead favoring public sector spending.

What does Judy Shelton imply about the Federal Reserve's reaction to the latest economic report?

Shelton implies that the Federal Reserve will find the latest economic report sobering, as it challenges their current monetary policy stance and may force them to reconsider their approach to interest rates.

How does Judy Shelton characterize the Federal Reserve's stance on the possibility of stagflation?

Shelton characterizes the Federal Reserve's stance as dismissive regarding the possibility of stagflation. Chair Powell is quoted as saying he doesn't see that at all, indicating a belief that the current economic conditions do not warrant such concerns.

Outlines

00:00

📉 Monetary Policy and Economic Activity

The first paragraph discusses the Federal Reserve's recent economic report and its implications for monetary policy. Judy Shelton, a Senior Fellow at the Independent Institute, suggests that the report could prompt the Federal Reserve to reconsider its stance on interest rates. She notes that Chair Powell has indicated a preference for cutting rates rather than maintaining the status quo, even in the face of concerns about stagflation. Shelton points out that the economic situation has changed significantly since December, with the Fed now viewing the current interest rate as restrictive. Despite this, she argues that fiscal policy, particularly large-scale government spending under the Biden administration, is working at cross purposes to the Fed's goals, potentially exacerbating inflationary pressures. The paragraph concludes with a discussion of how the Fed's approach to interest rates can impact private lending and economic activity, with a focus on the challenges faced by small businesses.

Keywords

💡Federal Reserve

The Federal Reserve, often referred to as 'the Fed,' is the central banking system of the United States. It plays a critical role in setting monetary policy, which includes managing interest rates and controlling inflation. In the script, Judy Shelton discusses the Fed's recent actions and their impact on the economy, indicating that the Fed is trying to slow down economic activity by raising interest rates.

💡Economic Activity

Economic activity refers to the production, distribution, and consumption of goods and services within an economy. It is a key indicator of the health and performance of that economy. The transcript highlights that the Fed is attempting to slow down economic activity, which is a strategy to control inflation and prevent overheating of the economy.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In the context of the video, the Fed is concerned about inflation and has taken steps to reduce it by making current interest rates restrictive, which can slow down spending and thus control inflation.

💡Interest Rates

Interest rates are the cost of borrowing money and the return on saving money. The Fed controls short-term interest rates, which can influence economic activity by making borrowing more or less expensive. The transcript mentions that the Fed has raised interest rates, which is a tool used to curb economic activity and inflation.

💡Fiscal Policy

Fiscal policy refers to government spending and taxation policies that can influence the economy. It is contrasted with monetary policy, which is managed by the Fed. In the script, Shelton points out that fiscal policy, as implemented by the federal government and the Biden administration, is working at cross purposes with the Fed's monetary policy, potentially undermining the Fed's efforts to slow down the economy.

💡Monetary Policy

Monetary policy is the policy adopted by a monetary authority, such as the Federal Reserve, that influences the availability and cost of money in the economy through changes in interest rates, the money supply, or other means. The transcript discusses the Fed's use of restrictive monetary policy to slow down economic activity.

💡Stagflation

Stagflation is a situation in which the economy experiences both stagnation (slow growth and high unemployment) and inflation (a rapid increase in prices) at the same time. Chair Powell, as mentioned in the transcript, dismisses concerns of stagflation, indicating that he does not see it as a current issue.

💡Unemployment

Unemployment refers to the number or percentage of people in an economy who are without work and actively seeking employment. The transcript notes that unemployment was low when the Fed was pleased with the reduction in inflation, suggesting a healthy economy. However, the current discussion implies that the Fed is now concerned about the potential for unemployment to rise as a result of their restrictive policies.

💡Public Borrowing

Public borrowing refers to the practice where a government raises funds by issuing debt, such as bonds. In the script, it is mentioned that the current interest rates are not holding back public borrowing, which is in contrast to the Fed's goal of slowing down economic activity.

💡Private Lending

Private lending involves lending money by private institutions, such as banks and other financial entities, to individuals or businesses. The transcript suggests that the Fed's restrictive interest rates are affecting private lending, making it more expensive and potentially hindering economic growth.

💡FED Deposit Account

A FED deposit account is an account held by depository institutions, such as commercial banks, at the Federal Reserve. The script mentions that the Fed decided to pay commercial banks a high rate to keep their money in these accounts, which can reduce the money supply and is a method to control inflation by making it less attractive for banks to lend out these funds.

Highlights

Judy Shelton, a Senior Fellow at the Independent Institute, discusses the Federal Reserve's actions.

The Federal Reserve is considering whether they stopped cutting rates too soon.

Chair Powell prefers to cut rates rather than maintain the status quo.

Powell dismisses the possibility of stagflation.

Since December, there has been a significant change in the Federal Reserve's outlook on inflation and growth.

The Federal Reserve considers the current rate to be restrictive.

The rate has been reduced from 4.9% to 3.4% to 1.6% in the last quarter.

Restrictive monetary policy is affecting private lending but not public borrowing.

Fiscal policy is working at cross purposes with the Federal Reserve's aims.

The Federal Government and the Biden Administration are spending on big projects, which contrasts with the Fed's attempts to slow down economic activity.

Public projects are creating jobs, which increases demand and puts pressure on prices.

Shelton questions whether restrictive monetary policy can counteract the government's economic stimulus.

The Fed's method of raising interest rates is explained, with commercial banks paid to keep money in Fed accounts.

High borrowing costs can prevent small companies from expanding and hiring.

The deliberate nature of the Fed's actions to slow down economic activity is emphasized.

The government's actions are described as the opposite of what the Fed is trying to achieve.

The resource allocation by the government is highlighted as a key point of divergence from the Fed's monetary policy.