While Wall Street cheered the continuation of easy money with the Federal Reserve’s decision to keep its main policy rate near zero, currency funds manager Axel Merk argues the U.S. central bank is exceeding the role it should be playing — to the economy’s peril.
Markets rose Wednesday, despite concern about weak inflation inducing Fed policymakers to unanimously vote to postpone a long-anticipated tightening of rates.
But to the Merk Funds founder and veteran Fed watcher, there’s something wrong with the picture of the U.S. central bank “still arguing whether we can afford interest rates above 0%” seven years after the global financial crisis.
In his latest commentary, which appears occasionally on his website, Merk critiques an extraordinary policy he says benefits those with assets but not ordinary working people; benefits governments seeking to finance deficits but to their publics’ long-term detriment; and inflates asset bubbles but at the cost of distorting fundamentals-based price signals, thus obscuring what investments are genuinely worthwhile.
More ominously, Merk warns that superlow rates endanger the very fabric of society.
“It’s more than money that is at stake,” he writes. “The Great Depression ended in World War II — we don’t think that’s a coincidence. When central banks help to prop up systems that are unsustainable, populist leaders come to power. Because if there’s one thing that hasn’t changed in history it is that policymakers rarely ever blame themselves for the challenges they are facing.”
And therein lies the core of Merk’s concern — that the Fed’s increasingly wide-ranging mandate takes the central bank into the realm of politics.
“The Bernanke Fed crossed the Rubicon when it first started buying mortage-backed securities. … By choosing to favor the housing market over other sectors of the economy, the Fed started to meddle on fiscal turf,” he writes.
It is therefore no surprise to the fund exec that politicians in turn now want to audit the Fed, seeing its powers and scope expanding over time from the addition to employment to its inflation-watching mandate, as well as its more recent roles in consumer protection and oversight of financial stability.
Because Merk worries that expectations for central banks’ role in the economy continue to ratchet to levels beyond their competence, the currencies expert suggests debate on (without necessarily endorsing) a number of possible initiatives, including:
Eliminating the Fed; eliminating fractional reserve banking; reintroducing a gold standard; individual investors’ assuming their own personal gold standard; keeping the Fed far away from fiscal policy, for example by limiting its holdings to Treasuries (and not mortgage-backed securities); reducing the Fed’s mandate to a sole focus on inflation; and introducing an interest-rate benchmark, such as the Taylor Rule, from which the Fed could deviate albeit with an explanation — as a means of moving away from “the tea leaf readings that take place now.”
— Check out Fed Holds Rates Steady, Signals Slow Increase on ThinkAdvisor.