Over at Mark Thoma’s indispensable Economist’s View is a sub-blog by Tim Duy, Fed Watch. Generally, it is too technical for me. But the other day, I was really struck by an article, Makes You Wonder What The Fed Is Thinking. Of course, I always wonder what the Fed is thinking. But when someone like Duy says that, it makes me take note.
He started by noting that one of the reasons that the Federal Reserve is set to raise interest rates is because it believes that the inflation rate will “approach” its 2% target in 2016. Now before we get to Duy’s point, think about that for a moment. According to the Fed, it is supposed to target 2%. Now it’s looking like the Fed is saying that really the 2% target is a ceiling. They are not willing to let it get above that point. If that’s the case, I wish the Fed could tell us so that we could fire them all and restructure the organization. As it is, the Fed doesn’t seem to be much concerned with employment, which is the other thing that it is supposed to do.
But as Josh Zumbrun noted in The Wall Street Journal, while the Fed may think that inflation will “approach” 2% next year, “The trouble is they have made the same prediction for the past four years.” It seems that in Fedlandia, we are always and forever on the verge of inflation. The Fed isn’t any better than the Ron Pauls of the world who tell us we must buy gold because hyperinflation is coming. The Fed types scoff that such idiocy. But they don’t seem to be able to learn from their own failed predictions.
What Duy highlighted is the asymmetric nature of the Fed interest rate increases. If the economy starts to heat up, causing inflation — the Fed can just raise interest rates as high and for as long as necessary. But if economy goes into recession, the Fed can only lower interest rates to zero. So if they raise interest rates too soon, there is little the Fed can do to fight the resulting recession. There are other asymmetries in all of this. And they all point in the same direction. So why raise rates now?
Duy mentioned the “financial stability” argument. According to this argument, low interest rates will “encourage excessive risk-taking.” Really?! Because I remember the Fed watching the tech bubble and the housing bubble inflate over years without doing anything about it. I think this argument is just more apologetics. The situation is this: the Fed wants to raise interest rates; but there is no real reason to raise interest rates; so the Fed goes looking for reasons to justify things it wants to do regardless.
I’m sorry to be constantly harping on the Federal Reserve. But it really is ridiculously important. The truth is that with the current philosophy of the Fed, the working class will never get ahead. As soon as the economy is starting to do well enough that workers can share in productivity growth, the Fed puts on the brakes. This is not good. In general, the Fed has not been a major tool of the power elite. But it looks more and more like that. And imagine what it would be doing if it had been filled with people by Donald Trump or Ted Cruz? It’s too frightening to contemplate.