FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 15, 2022

IN THIS ISSUE:

1. A Surprising New Report On Political Makeup of Fed

2. Some Quick Facts About the Federal Reserve System

3. Federal Reserve Is A Non-Political Government Entity

4. 10-To-1 Ratio – How Does Such A Mismatch Occur?

5. Russian Debt Default Risk Rises Significantly – Scary!

Overview – Surprising New Report On Political Makeup of Fed

The Federal Reserve Open Market Committee (FOMC) is meeting today and tomorrow to set monetary policy, as it does every six weeks or so. The FOMC is almost unanimously expected to increase its Fed Funds rate by 0.25% from a range of 0.00%-0.25% (effectively zero) to 0.25%-0.50%. Then it is expected to raise the rate by an additional 0.25% at each of the upcoming FOMC meetings later this year.

The Fed, which is normally very secretive about its monetary policy intentions, has been very vocal about its plans to “normalize” short-term interest rates this year with several incremental hikes in the Fed Funds rate. Fed Chairman Jerome Powell and other high ranking Fed officials have all but promised several rate hikes this year. No surprise there whatsoever.

I did, however, run across something very interesting about the Fed last week which I did not know. Actually, several things I did not know, and I have been an avid “Fedwatcher” throughout my 40+ year career in the investment business. I’ll share these new things I’ve recently learned about the Fed as we go along today, and I think you’ll find them quite interesting.

Some Quick Facts About the Federal Reserve System

Let me begin by saying I consider myself to be an avid Fedwatcher. I monitor the periodic policy statements and meeting minutes carefully. The Federal Reserve (the “Fed”) is the central banking system of the United States. It was established by Congress in late 1913 and consists of 12 regional Federal Reserve Banks scattered in major cities around the country.

The Fed has over 20,000 employees, including 780 fulltime economists as of the end of last year. It’s these economists I’ll be focusing on below. The Fed is overseen by the Federal Reserve Board of Governors which consists of seven members who are appointed by the President of the United States, confirmed by the Senate and serve revolving 14-year terms.

The current Chairman of the Federal Reserve Board is Jerome “Jay” Powell, a Republican appointed by Donald Trump and assumed that office in early 2018.

Currently, three of the seven seats on the Board of Governors are vacant. President Biden recently nominated three individuals to fill those vacancies: Sarah Bloom Raskin, Lisa Cook and Philip Jefferson. While I would consider all three nominees to be liberal-leaning, I expect they will all be confirmed by the Senate just ahead.

Federal Reserve Is A Non-Political Government Entity, Right?

The Fed’s stated mission is a so-called “dual mandate” of maximum employment and stable prices. With the Consumer Price Index now running at a 40-year high of 7.9% annual rate, it is easy to say the Fed is currently failing to succeed in keeping prices stable. That is, however, another discussion for another day.

Today I want to focus on whether or not there is a political side to the Fed. This is where we get to the most interesting thing I learned recently.

Most investors would agree the Federal Reserve plays an important role in our financial system, and this is no doubt true. But most investors would probably also say the Fed is NOT a political entity.

While I would have agreed with that assessment in years past, I have noticed in recent years Fed officials have increasingly emphasized social issues in their public speeches, in their seminars and even in periodic research reports and white papers they publish.

In short, I’ve noticed a significant shift in Fed policy emphasis from strictly monetary issues to more cultural issues, which I find more than just a little curious.

My curiosity morphed into a real concern when I read an opinion piece in The Wall Street Journal last week (March 7) entitled: “How Politicized Is The Federal Reserve?” The author, Emre Kuvvet, a finance professor at Nova Southeastern University, argues the Federal Reserve is already highly politicized and is rapidly getting worse.

Mr. Kuvvet has done his homework on this issue. Remember above I stated there are 780 economists who work at the Fed? Mr. Kuvvet researched the political affiliation of most Federal Reserve System economists using various state, county and city voter-registration databases. Here’s the shocking conclusion:

What he found was that in 2021 the overall Democrat-to-Republican ratio was 10.4 to 1 among Fed economists. For every Republican economist at the Federal Reserve, there are more than 10 Democrats. Wow!

10-To-1 Ratio – How Does Such A Mismatch Occur?

The lowest Democrat/Republican ratio was 3-to-1 at the Cleveland Fed while the highest was 12-to-1 at the San Francisco Fed, with an average of 10-to-1 among economists across the regional Federal Reserve Banks Mr. Kuvvet was able to examine.

What Mr. Kuvvet does not reveal is how long this glaring mismatch has existed, but it is clear it is growing. Several Fed Reserve Banks are actually proud of their progressive policy stances and even point them out on their websites.

The New York Fed states on its homepage that it “stands in unity with all those who oppose racism, hate, and violence.”

It wishes “to root out the intolerable inequities and injustice grounded in systemic racism that persist in our society.” and,

This job won’t be done “until access to health, education, safety, and justice knows no racial or other boundaries.”

Can’t get much more in your face than that!

This got me to thinking: How does this happen? As noted above, the members of the Federal Reserve Board of Governors are appointed by the President. So, I looked up the number of Democrat versus Republican presidents we’ve had since the Republican party was formed in 1854.

There have been 19 Republican presidents versus 14 Democrats during this period. This makes the current 10-1 ratio even harder to envision. This suggests Fed Governors appointed by Republican presidents were less insistent on hiring conservative economists than their Democrat counterparts.

As noted above, I believe the three new Board of Governors nominees from President Biden will be confirmed by the Senate just ahead. This suggests the 10-to-1 ratio will remain just as wide, if not get even wider, as these Democrats fill the three vacant seats on the Board.

FINAL THOUGHT: Upon learning the Fed is so heavily stacked with Democrats, it occurs to me that most other government agencies – and there are hundreds of them – are probably also loaded with Democrats. Maybe not 10-to-1 like the Fed but heavily dominated by the Left. I’ll be looking into this in the weeks ahead, and I’ll report back to you what I find.

Russian Debt Default Risk Rises Significantly – Scary!

Russia is at “imminent risk” of defaulting on its debts as Western economic sanctions choke off its access to dollars and other global currencies to pay lenders, a move that would have devastating economic ripple effects – so warn some international credit ratings agencies.

Fitch Ratings downgraded Russia’s credit to “C,” or junk status, cautioning investors last Wednesday that Moscow was careening toward an inability to make good on its debts. Moody’s and S&P Global, the two other dominant international credit agencies, issued similar warnings in recent days.

The downgrades are signals to investors to steer clear of Russia, lest they get caught up in the expanding sanctions or sink money into assets which are bleeding value by the day. But a default, which analysts are beginning to see as inevitable, could have far more sweeping consequences, sending lenders scurrying for financial high ground and fleeing developing international markets that rely on risk-tolerant investors.

Lenders doing business with Russia often conduct transactions in dollars or euros specifically because Moscow’s economy is more volatile and emerging. But President Vladimir Putin has said his government could force lenders in certain countries to accept only Russian currency. As of Wednesday afternoon, the exchange rate had skyrocketed to 120 rubles to $1. The Kremlin also has barred its citizens from withdrawing more than $10,000 in hard currency from the nation’s banks.

Broad, stiff economic sanctions imposed by the United States and to a lesser extent the European Union – including a US ban on imports of Russian oil and energy – are starving the Russian economy of new revenues.

Inside Russia, a default would mean tremendous economic hardship for ordinary people. A lack of capital could mean massive unemployment, with the government and other major employers unable to raise funds to meet payrolls. Consumer credit would evaporate, with Russian banks cut off from international financial systems.

Morgan Stanley’s global head of emerging-market sovereign credit strategy warned in a research note last week that Russia could default as soon as April 15, when the 30-day grace period on a $107 million bond interest payment expires. Two more bond payments worth $359 million and $2 billion are due March 31 and April 4, respectively, with 30-day extensions, according to Reuters.

In closing, as investors, we need to keep a very close eye on developments in Russia since a default could trigger a new global financial crisis, which could be quite bearish for stock markets around the world. Hopefully, it won’t come to that but the trend is not good!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Gary's Between the Lines column: Americans’ Greatest Concerns On Major National Issues

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.