An Independent Fed

Yesterday the Fed raised rates.  A lot of supporters of the President were upset and I am sure the President was upset too.  Higher rates increase the cost of doing business.  The alternative is inflation and despite the GDP growth over the past two years our economy is still in a precarious position.

If you are a supporter of the President, there are other things you ought to be ticked at.  The way Congress budgets using continuing resolutions is stupid.  He ought to end it and force real budgets.  You ought to be ticked at the lackadaisical attitude of Democrats and Establishment Republicans when it comes to budget discipline and deficits.  You should be outraged at tariffs and subsidies since those are taxes on American people and are hurting GDP growth.  You might be outraged that the President didn’t get what he needed for border security which undermines the American economy.

The reason our economy is in a bit of a precarious position is many fold.  The obvious reason is tariffs and subsidies.  Those are taxes on the American people.  The offset the tax cut that was passed.  Another reason is that we are starting to see how totalitarian China’s economy is.  Occasionally, you’d see behind the veil like when they banned short selling in the stock market but now we are seeing more and more.  China is a frenemy of the US.  Their top brass detests free and open markets.

But, I think the other reason we are in a precarious position is that the Fed was more political than economic during the Obama administration.  Holding rates at 0% or next to 0% for so long was a huge mistake that has created impalances throughout our economy.   As Eugene Fama says, you only see those imbalances in the rear view mirror.  If we knew exactly where they were we could judiciously attack them.  The “Quantitative easing forever” policy started by Bernanke and handed to Yellen was poor policy.  Yellen should have moved to raise interest rates sooner, but wanted to protect the President.  If there would have been a real cost to money growth would have been next to nothing given the regulatory and tax burdens Obama put on the economy.

All the free cash that inflated bubbles needs to come out, and raising rates helps that.  Yellen did a poor job as Fed President.

As I said the other day, I don’t think we will see a Recession.  Brian Wesbury tweeted out the same sentiment yesterday.   The news cycle is giving rise to a bunch of scare monsters that report news but really don’t know a lot about economics or finance.  Instead of really good GDP growth, we might see it slow.

I am not happy or sad the Fed raised rates yesterday.   What I hope is that they will look at data independently and have a spirited debate among the various Fed governors.  I am happy to see that there is a real cost to money these days.  That forces businesses to create cost/opportunity cost tableau’s and forces more discipline in decision making.

More disciplined business decision making is a good thing and will create more growth, not less.