You’re Paying the Price for the Fed's Failed Experiment
Peter Reagan

Treasury Secretary Scott Bessent did something unusual last week: he told the truth about the Federal Reserve. In a Wall Street Journal op-ed, Bessent accused the Fed of conducting what he called a “gain-of-function” experiment in monetary policy. The analogy is deliberate and damning. Just as lab-made viruses can escape their confines and wreak havoc,…

Treasury Secretary Scott Bessent did something unusual last week: he told the truth about the Federal Reserve.

In a Wall Street Journal op-ed, Bessent accused the Fed of conducting what he called a “gain-of-function” experiment in monetary policy. The analogy is deliberate and damning. Just as lab-made viruses can escape their confines and wreak havoc, the Fed’s “extraordinary” policy tools – zero interest rates, quantitative easing, offering endless backstops for financial assets – have escaped their “temporary” emergency role and become permanent.

And the consequences? 

Predictable, and devastating.

The “wealth effect” – winners keep winning

Bessent’s central charge is simple: The Fed strayed from its specific mission of stable prices and maximum employment. 

Instead, under Bernanke, Yellen and Powell tried to juice overall economic growth by deliberately inflating asset prices – a strategy known as the “wealth effect.” Analyst Wolf Richter has a fantastic explainer on the wealth effect here.

The logic goes like this: 

• If your home value rises or your 401(k) balance looks fatter, you’ll feel richer
  
  
• When you feel richer, you spend more money
  
  
• (Because one person’s spending is another person’s income) when you spend money, the economy grows
  
  
• When everyone spends money, that makes prices go up (supply and demand)...
  
  
• …but, if everyone’s got a piece of the growing economy, everyone wins!

Does it work? 

…well, yes and no. Take a look at this chart and you'll see the wealth effect in action:

Red arrow indicates approximate beginning of Fed’s “gain of function research.” Data via St. Louis Federal Reserve.

Remember, in theory, the wealth effect makes everyone wealthier.

In practice, the only people who truly benefitted were those who already owned significant assets – the wealthiest 1% of American families. The top 10% wealthiest did okay.

Everyone else? All we got was a higher cost of living.

Take housing, for example. Longtime homeowners with fixed-rate mortgages signed before 2023 watched their equity balloon – and, for years at a time, paid an APR lower than inflation. Younger families, hoping to buy their first home, got priced out entirely. Today, the average family can no longer afford the average house.

This isn’t an accident. 

It’s the direct result of the Fed’s policies.

America’s two-tier economy

Take another look at that chart. Clearly, the Fed’s wealth-effect experiment didn’t “lift all boats.” Instead, it split the economy in two:

• The already-wealthy: The top 10% wealthiest, who already own some 70% of all financial assets, largely insulated from inflation, watch their wealth explode.
  
  
• Everyone else: Working Americans, stuck with stagnant wages while housing, groceries, healthcare, utilities etc. have soared 2-3x faster than official inflation.

Back in 2020, a RAND study found more than $50 trillion has been siphoned from the bottom 90% of Americans since the 1970s. That timeline coincides almost perfectly with the end of sound money – which enabled the rise of experimental Fed policies.

The data are clear: The Fed hasn’t been the guardian of the middle class. Rather, they've played the role of Robin Hood in reverse – robbing the workers to give to the wealthy.

Bessent is right to call them out – the Federal Reserve has been the chief engineer of inequality.

Good news and bad news about Bessent’s solution

To his credit, Bessent calls for reform. He says the Fed must narrow its focus, cut back on unconventional tools and restore independence.

But here’s the hard truth: Even if the Fed wanted to change course tomorrow, it cannot undo the damage of decades.

You can’t un-pop housing bubbles.

You can’t claw back trillions funneled from the middle class into the wealthiest families’ bank accounts.

 You can’t erase the fragility baked into an economy addicted to cheap debt and bailouts.

Bessent rightly points out that the Fed’s institutional independence is at stake. But not from President Trump’s calls for lower interest rates – from their own actions!

The Fed hasn’t just destroyed its own credibility. It has become a crisis machine, trapped in a cycle of creating the very instability it claims to fight.

Why gold demand keeps rising

This brings us to the most important question: Why do you think the price of gold has surged recently?

Why are central banks around the world hoarding gold at record levels?

Because they know the truth. 

The only institution on earth responsible for safeguarding the dollar’s purchasing power has failed – utterly and obviously.

Gold doesn’t rely on the Fed’s credibility. It can’t be printed. It doesn’t suffer from  “mission creep” or groupthink. 

Gold simply holds value – today, tomorrow, and as it has for 5,000 years.

The primary thing you must understand

Bessent is right to call out the Fed’s gain-of-function experiment. But he stops short of offering a real solution for everyday American families. 

Unless someone invents a time machine, reform in Washington won’t come soon enough – if it comes at all.

That leaves you, me and 90% of American families with a stark choice:

• Continue trusting an institution that has proven itself incapable of defending your purchasing power
  
• Or diversify with financial assets beyond the Fed’s reach – specifically, physical precious metals

One is an experiment gone wrong. The other is a time-tested safe haven, a store of value. Which would you rather bet your financial future on?

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

www.birchgold.com