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The Fed in the Chicken Coop

Was the creation of the Federal Reserve harmful or helpful? Evidence suggests the former, leading to the title of Fed in the Chicken Coop. This post is an update of an article originally published at The American Thinker.

The Church of the Federal Reserve opened its tent for quarterly services again this week. Jerome Powell played the role of Pastor Elmer Gantry. Like the actors who preceded him, he claimed the Fed was on top of the matter and in control. The message to the faithful was that everything was fine. His predecessors made similar claims.

His 75 basis-point interest rate hike matched the prior meeting’s 75 points for a total rise of 1.5 percentage points in three months. This action conveyed Pastor Powell’s seriousness in combatting inflation.

Parishioners of the competing religion, the Church of Free Markets, challenged his credibility by driving the stock market higher. Higher interest rates should lower stock values, yet the market response to Powell’s actions drove markets

Initial market response suggests that investors do not believe Pastor Powell is serious or did enough.

The close of some key market prices, before the Fed announcement (July 26) and at the end of the week (July 29), appear in the table below:

Closing Prices Gain
Stocks/Indices 26-Jul-22 29-Jul-22 Percent
DOW JONES INDUSTRIALS 31,764 32,845 3.40%
GOLD (GLD) 160 164.1 2.56%
TECH (QQQ) 294.3 315.5 7.20%

This initial reaction suggests that markets do not believe that Pastor Gantry has done enough and suggests that they don’t believe he will follow through on the additional necessary moves. Subsequent actions are necessary for them to take the Fed seriously.

Markets delivered a “slap in the face” reaction to the Fed. Or perhaps they poured expensive gasoline on the Fires of Hell. Elmer “needs a bigger boat” to solve this problem. Future Fed actions are necessary!

The Federal Reserve is a religion and a bad one at that. Its founding in 1913 was suspicious. G. Edward Griffin addressed this issue in The Creature from Jekyll Island (free PDF here). That year was the worst in US history for freedom lovers. The year also saw the ratification of the 16th Amendment, the permanent income tax.

These two events provided government the power to take whatever portion of private income it deemed necessary and to counterfeit at will. 1913 dealt mortal blows to freedom. Few recognized the implications of these two events.

The Federal Reserve was supposed to provide safer banks and reduce economic swings. Clearly, they failed both missions shortly after creation. Initially, the failure was dramatic. Nothing like the 1930s had occurred before. “The Great Depression” was the term applied to differentiate it from all prior downturns (which had been called “depressions”). From then until today, “recession” has described downturns. (Modern marketing techniques and “spin” were political tools early on.)

Was the Depression and its timing coincidental to the Fed’s creation or was there a causal relationship tied to Fed policy? Were the “training wheels” removed too soon? Or should this bastard agency have died at birth?

We will address these questions in a future article.