Economic Security: Watch The Fed

The two most important operational appointments President Barack Obama will make are the Secretary of Defense and the Chairman of the Federal Reserve Board. These powerful agencies are just across the Potomac River from each other, and to say the fate of the nation is in their hands is only a slight exaggeration.

Curiously, Obama has decided to re-appoint President Bush’s defense secretary, as well as Bush’s top central banker. Perhaps that makes the reader a little suspicious, but we’ll leave that discussion for another blog.

Can we ever figure out where that sneaky animal, the economy, is going? Not likely, but there is one rule you have to assimilate: Watch the Fed. The Federal Reserve Board is America’s central bank, and it sets interest rates for U.S. dollar creation, which is the domestic currency of the world’s largest economy, and the reserve currency for the rest of the world. Yes there are many other factors in economics like taxes, trade and regulations. But nothing, nothing, trumps the power of the Fed.

Is the Federal Reserve Board all knowing and all seeing? No. It is run by humans like you and me. Actually, it is run by economists.

Once the last vestiges of the dollar’s link to gold were severed in 1971, it became economists that determined our domestic monetary policy and international dollar strategy. Those who remember the double-digit inflation of the 1970s, 9% mortgages in the 1980s, the relative price stability of the 1990s, and the negative real interest rates this decade know it has been a wild ride indeed. And anyone dealing with severe exchange rate swings in the international trade arena must wonder if there is a better way.

So keep a close eye on the Federal Reserve Board and that Bush-Obama appointee Ben Bernanke. The Fed’s decisions will be the single most important factor in our near term prosperity, or lack thereof. The (bailed out) Masters of the Universe on Wall Street understand this, and so should you.