As I write (Sunday, 8:40 p.m.), the price of gold is spiking, having reached $4,590 per ounce, compared with just under $4,520 recently. There’s quite a bit going on that might explain that, but the main reason must be the news that the Justice Department has served the Fed with grand jury subpoenas.
In a statement in reply, Fed Chairman Jerome Powell did not mince his words. Here is an extract (my emphasis added):
On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to my testimony before the Senate Banking Committee last June. That testimony concerned in part a multi-year project to renovate historic Federal Reserve office buildings.
I have deep respect for the rule of law and for accountability in our democracy. No one—certainly not the chair of the Federal Reserve — is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.
This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.
This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions — or whether instead monetary policy will be directed by political pressure or intimidation.
Time will tell, I suppose, but this is not the first time that the renovation issue has been raised by President Trump, and it is, of course, no secret that he wants to see interest rates come down a long way, despite the fact that inflation shows no sign of approaching the Fed’s official, 2 percent target. That’s really how to understand Trump’s, uh, interesting decision to instruct Fannie Mae and Freddie Mac to buy $200 billion in mortgage bonds in the name of housing affordability, a maneuver unlikely to work other (perhaps) than in the short term.
Bloomberg (January 9):
By pressing the government-backed housing-finance giants to act as large-scale buyers, the move also signals a broader assertion of executive authority, effectively placing the White House in a role traditionally reserved for the Federal Reserve and intensifying debate over how far presidents can go in steering financial markets.
If the firms carry out the purchases as instructed — the timing and pace are still unclear — it would be the first time in living memory a US president has directly intervened in housing finance through large-scale asset buying, according to market participants.
That’s striking because the task of influencing interest rates across broad swaths of the economy has historically belonged to the Fed, which is designed to be insulated from political interference…
The problem with attacking the Fed’s independence (or even to be perceived as attacking the Fed’s independence) is that it increases investors’ concern about the degree to which the value of the money they lend the U.S. (through buying treasuries) will be eaten away by inflation. All other things being equal (and in the case of treasuries, traditionally seen as a safe haven, all other things are often not equal), that ought to mean that the price that bond buyers charge for their money the interest rate — should rise. If that becomes the case in the U.S., political pressure on the Fed will, over time, be self-defeating.
Time, again, will tell. Doubtless the price of gold and silver will bounce around a bit, but I doubt that fans of the “debasement trade” will be changing their minds anytime soon.