Brilliant action by the Fed, which kept interest rates low for more than 8 years, was instrumental in preventing the Great Recession from becoming a depression. It was an exceptional achievement considering the mess our bankers has created. Low interest rates and QE debt purchases ended the downturn and worked together with technology improvements, the Amazon effect and other factors to fuel a low-inflation recovery. Eliminating many Obama administration regulations and the once in a generation business tax cut spearheaded by President Trump have greatly stimulated the GDP. But a large number of fools including those currently leading the Fed seem bent on ending the upturn and causing a recession. Chairman Jerome Powell apparently learned nothing from the Fed’s efforts of recent years. Maybe it’s his banking background. Banks make higher profits in periods of rising interest rates. It is no surprise that most bankers think that rising interest rates are desirable, even necessary, in a growing economy to prevent excessive inflation.
Since wealth begets wealth perpetual economic growth in the range of 5 to 10% should be attainable. China has grown at that rate for many years. It’s clear that it will not happen under Chairman Powell if he follows the advice of incompetent economists who want three or four rate increases this year and at least two more next year accompanied by a faster reduction in the Fed’s balance sheet. Such actions will choke off the growth and are likely to cause short term interest rates to exceed long term rates. Economists debate whether an interest rate inversion will cause a recession. Why foolishly create the risk?
Interest is the cost of money. The higher the rate, the greater the cost of funding business operations, including the cost of capital investments and carrying inventory and receivables. It will also over a few years have a devastating impact the cost of carrying our $20 trillion National Debt as the debt rolls over at higher rates. Rising interest rates will as usual CAUSE, not PREVENT, inflation by pushing up costs and lead our economy into the much-anticipated recession. Interest rates should at all times be kept at or below the desired rate of inflation. By doing so and controlling its balance sheet the Fed can (assuming sound fiscal policy and adequate regulation of banks and excessive risk) avoid future recessions. Eliminating recessions, minimizing interest payments on the National Debt and maximizing economic growth should be added by Congress to the Fed mandates. Each is consistent with maintaining full employment. The Fed should be given the responsibility to react to events such as natural disasters or significant stock market declines or even a slowing of economic growth to keep the economy on a steady course.
The nonsensical talk about Fed independence is back in vogue. Of course the Fed should be independent to make its decisions. But, it does not act in a vacuum. It should invite criticism of its actions and be in constant contact with and coordinate its actions with Congress and Executive Branch.