Federal Reserve’s Potentially Catastrophic Mistake

Federal ReserveJust as recently, I’ve been going on and on about liberal attacks on Bernie Sanders, a month and a half ago, I was going on and on about the impending rise in interest rates by the Federal Reserve. And I know it’s annoying. It is so much better to mix things up. That’s why it’s so great to have James around to write things like his most recent, Minnesota Advice for Those Suffering the Cold Weather in the East. My understanding is that the women back there are strong and James is good looking. Anyway, I am going to rant about the things that I’m going to rant about. And today, it is back to the Fed.

As you may have noticed, Wall Street has been going wild. And it seems that the economy has slowed sharply over the last month. (Please: don’t ask me about Christmas; they take that stuff into account.) And so now it looks like the Fed’s brilliant idea of raising interest rates even while the inflation rate continued to be below its target seems like a bad idea that was seen by pretty much everyone who didn’t have a vested interest.

“Most economists maintain the risk of a US recession this year are slim, but markets are now pricing roughly even odds of one, and that in itself has consequences.” —Robin Wigglesworth

Robin Wigglesworth at the Financial Times wrote, Talk of Fed “Policy Error” Grows.[1] He quoted JPMorgan Asset Management officer Bob Michele saying what I seem to have been saying for the last few years (ever since the Fed started publicly itching to raise rates), “Historically the Fed has raised rates because either growth or inflation was uncomfortably high. This time is different — growth is slow; wage growth is limited; deflation is being imported.” So why did they do it? I guess in a sense, it is like asking why the Mad Hatter and the March Hare keep changing seats: by the rules of normal people, they are insane.

But none of this means that our current problems are due to the Federal Reserve. It is just that the rate hike worked in exactly the opposite direction that we needed to go. Lots of people like Paul Krugman have argued that the problem with the rate hike was the asymmetric risk. There was basically no risk of putting off an interest rate increase, but there was a huge risk of raising too soon. We can’t say just how all of this is going to turn out. But here is a chilling bit of reporting from Wigglesworth, “Most economists maintain the risk of a US recession this year are slim, but markets are now pricing roughly even odds of one, and that in itself has consequences.”

Could Federal Reserve Get Trump Elected?

Tim Duy (the Fed Watch guy) thinks that we won’t have a recession because it is a “sector-specific shock” and not an “economywide shock.” That means something to me because Duy is a brilliant guy who does tend to understand this stuff. Just the same, another economist who I listen to, Brad DeLong, wrote:

Does anybody think that if the FOMC back last December had known how December and January would turn out that it would have raised interest rates then? Given that they would not have, why are they not intending to lower interest rates now at this meeting?

If you asked Tim Duy, the answer would be that the Federal Reserve thinks this is likely a temporary disturbance and that it’s very likely that far from reversing course, they will be able to continue raising interest rates, even if they can’t do it quite as fast as they had hoped. But I’m more focused on that asymmetric risk. What if the economy does go into recession? That almost certainly means President Trump or President Cruz. The Federal Reserve really does determine whether millions of people have jobs or not — and if tens of millions of workers gets raises. But what it does also affects who gets elected.

This stuff matters — a lot. And it terrifies me. It is perhaps the best example that we have that we don’t live in a democracy. We are all of us dependent upon what the plutocrats at the Federal Reserve do. And it affects us all the way down to the smallest city council.


[1] The article is behind a paywall. But I suspect you all know how to get around that if you need to. You could also, of course, subscribe.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

9 thoughts on “Federal Reserve’s Potentially Catastrophic Mistake

  1. Time to move to Antarctica since they will be balmy in a few years anyway.

    Stuff like this frustrates me because there is little any one person can do at any given time. It takes a large shock to the system to get progress done-thinking of the 1907 Panic! at the Wall Street that led to the passage of things like the Fed in the first place.

    • And one of the early Fed chairs was Marriner Eccles, who proposed much of the New Deal and who famously testified on Capitol Hill how “either we solve the problem of unemployment under capitalism, or the problem will be solved for us without capitalism.”

      Basically the Fed was a step in the right direction which was nowhere near the national banks progressives wanted (although they did get a state-run bank in North Dakota.) So, not good enough, but better than nothing. Now it’s almost reversed! It’s almost as though the Fed exists to stop even moderate reforms of banking abuses.

      • One of my friends almost ran for state treasurer last time on the issue of a state bank but unfortunately she did not think of it in time.

        So I suspect she will be doing so in the next race.

        • You think that’s possible in AZ? If so, and she runs, be sure and publicize that campaign everywhere you can. I’d donate to it. If I haven’t been turned into Soylent Green by then.

          People don’t realize how important state positions like ST and AG really are. They’re almost more important than governor.

          • I don’t see why not. It might require an amendment to the state constitution but it would be something that could be doable.

            She would run Clean (publicly funded) so no need for out of state money. The ballot initiative might though.

    • Well, it seems to me that if 2008 didn’t cause us to rethink our financial system, I’m not sure what will. Don’t go to Antarctica! Global warming affects the poles far more than the equator, so it’s going to be really unstable. Much better is is probably a rain forest in the northwest.

      • The problem is that our system still had too many fail safes in it and it really didn’t get bad enough.

  2. The women I know are strong, and the men are good lookers. They’re quite good at looking at things, like sports stats. Don’t forget that all the children are above average!

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