Publisher’s Note: The bottom line financially in the coming months is that Augusta-area companies and families will pay more to borrow money. It’s an effort by“The Fed” to slow the tide of inflation.
Last week, Dr. Franza wrote about the implications of the national debt.
Today, he looks into a few key financial meetings that will help determine all our budgets in the CSRA.
Although I am not an economist by education or training, as a higher education business educator in Augusta, I have learned that as businesspeople, consumers, and investors, it is critical to understand economics to successfully navigate the financial waters we traverse.
There’s a difference between fiscal policy and monetary policy.
Two recent events highlight those differences and the men in charge of those policies.
FISCAL POLICY
It is a term which describes a government’s taxing and spending actions. In the United States, fiscal policy is controlled jointly by two branches of government: the executive branch (i.e., the President) and the legislative branch (i.e., the Congress). The President’s responsibility is to outline spending and tax priorities in an annual budget request. Then it is up to Congress to develop budget resolutions based on the President’s budget, and ultimately review, revise, and pass those resolutions which specify tax laws and appropriate funding for federal programs and agencies. Therefore, everything I discussed related to the federal deficit in last week’s column is a result of fiscal policy in which spending has significantly outpaced revenues (i.e., taxes) in recent years. So, it will be up to the executive and legislative branches to get our fiscal house in order.
MONETARY POLICY
It is under the purview of a nation’s central bank, which in the case of the United States is the Federal Reserve. In addition to its responsibility for monetary policy, “the Fed” is responsible for the regulation of our banking system. Monetary policy is the set of actions used by a nation’s central bank to control the money supply and steer the overall economy. There are two basic types of monetary policy: Expansionary/loose and Contractionary/tight. Expansionary or loose monetary policy lowers interest rates and increases the money supply to help the economy grow during an economic slowdown or recession. Contractionary or tight monetary policy raises interest rates and decreases the money supply to slow growth and stop high inflation. The Fed manages monetary policy in the U.S. to achieve maximum employment and price stability, established by Congress as the Fed’s macroeconomic objectives and referred to as its “dual mandate.” Other than the dual mandate, the legislative and executive branches have no role in monetary policy, and the Fed has no role in fiscal policy. However, both monetary and fiscal (as indicated in last week’s column) policies play integral roles in the economic well-being of our country. Two recent events have allowed us to gain more insight into the primary leaders of these policies and allow us to think more about how these policies interact.
TWO IMPORTANT RECENT EVENTS
The Federal Reserve Bank of Kansas City (one of the Fed’s 12 regional banks) held its annual Jackson Hole (Wyoming) Economic Policy Symposium.
It was particularly noteworthy this year because there is a new Fed Chairman, Kevin Warsh. Since Mr. Warsh took over as Fed Chair in late May, he has limited his discussion of future monetary policy, so Jackson Hole was seen as an opportunity for him to provide more insight on the direction of monetary policy.
While Mr. Warsh indicated that under his leadership, the Fed will be “quieter,” scaling back on the Fed’s former modus operandi of providing “forward guidance,” he did indicate that inflation is still running well above the Fed’s 2% target and the central bank’s primary goal is to bring it back down to its target. Therefore, starting with the next Fed meeting later this month and continuing through the remainder of the year, we can expect a more contractionary/tight monetary policy through higher interest rates.
In the Executive Branch, President Trump’s “point man” for fiscal policy has been Treasury Secretary, Scott Bessent. This week, both Mr. Bessent and Mr. Warsh have been both present in Asheville, North Carolina, for the G20, an international forum that brings together major advanced and emerging economies to coordinate global economic policy. In Mr. Bessent’s remarks at the G20, he focused on economic growth, particularly through a policy of reducing burdensome regulation to stimulate growth. He also mentioned decreased public and private investment as a reason for limited growth. While I applaud his goal of more deregulation to allow for more growth, he neglected to address how our federal deficit is one of the major causes of decreasing public and private investment.
It is important for fiscal policy and monetary policy to be independent of one another because monetary policy run by the government can cause rampant inflation by lowering interest rates simply to make it easier to pay our debts. However, right now, an argument could be made for better coordination between our fiscal and monetary policies. As the Fed tries to lower inflation by increasing interest rates, the government is doing the Fed no favors by continuing to increase the deficit, which leads to higher inflation. While both Messrs. Warsh and Bessent are pro-growth, it will take some action on the fiscal policy side to reduce our debt and allow inflation to moderate for Mr. Warsh to be able to implement an expansionary/loose monetary policy by lowering interest rates. Until we are able to get our debt under control, monetary policy will be very limited in its ability to stimulate growth. Monetary and fiscal policy can impact the future success of your business and personal economic growth in the CSRA.
