Wednesday, June 28, 2017
 
With Latest Rate Rise, Fed vs. White House Battle Looks Inevitable

WASHINGTON, D.C. Mar. 16 (DPI) – Yesterday’s interest rate hike by the Federal Reserve – and a promise for more later in the year – sets the stage for a worsening relationship between the Fed and White House, which is counting on robust economic growth to help legitimize itself with its legions of skeptics and adversaries.

Higher rates – though still relatively low, as three .25% rate hikes in 18 months don’t amount to much – are finally a sign of “normalized” monetary policy after nearly 9 years of close-to-zero short-term rates by the Fed, all to stimulate an economy nearly wrecked by the 2008 financial crisis.

The so-called ZIRP (zero-interest rate policies) certainly helped avert disaster, but the US economy still has major structural problems – entitlement reform, tax reform, a lack of private business investment, for starters – that haven’t been addressed.

For the last decade pundits in the financial press assumed that the Fed was independent of political pressure, that the Central Bank answered to neither Republicans nor Democrats. Now, though, with a belligerent and unpredictable president, Fed Chairwoman Janet Yellin has openly challenged the nominal Republican Trump, in a way she and Ben Bernanke never did with presidents Barack Obama, or even George W. Bush.

Trump, assuming he is still in office a year from now, will replace Yellen with a Fed chair of his liking. In the meantime, a steady rise in interest rates will eventually choke the economy, and reveal the vulnerabilities of a still-overleveraged economy that incurred more debt to finance growth.

Economics blogger Neil Irwin of the NYT proclaimed that the Fed deserves to take a victory lap:

It has been a long time coming, and Ms. Yellen went out of her way to avoid mounting a metaphorical “Mission Accomplished” banner. But in the substance of her policies, it is evident that the Fed feels it has mostly accomplished its job.

The few readers who commented on Irwin’s column showed broad support for Yellen, but some also said any sense of “mission accomplished” was premature:

Competence and a lack of self-promotion in the Federal government. How refreshing!

The Democrats still control the most important branch of government.

I imagined that the Fed would trash the economy by raising the interest rate precipitously prior to the presidential election; but it looks like the fix is now in? Once interest rate hikes begin they seem to keep coming until the economy comes crashing down?

 

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