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 With its latest interest rate hike, the Federal
Reserve is desperately trying to repair the economic damage caused by the fiscal
and regulatory policies of the Biden administration. Unfortunately, persistence
in this course will only “solve” the problem by crashing the economy, which it
is perversely intended to do.
The Fed’s attempts to correct for overspending by Congress and the president are
a problem, not a solution.
“The Federal Reserve and other central banks are raising interest rates to beat
back inflation by slowing economic growth,” The Wall Street Journal reports.
The Fed’s manipulation of interest rates has a strange logic. When the federal
government overspends (note: it never underspends) and thereby fuels inflation,
the Fed reins in the economy by increasing interest rates, which makes it more
difficult to borrow money with which to invest in productive enterprise or
finance consumer purchases.
When that causes high unemployment, the Fed reverses course and pumps money into
the economy to spur investment and personal spending.
As a result, the Fed routinely sees good news as bad and bad news as good: a
growing economy and low unemployment are seen as inflationary, and the solution
is a recession.
The Fed implemented record-low interest rates throughout President Barack
Obama’s tenure, to mitigate the damage of his high-spending fiscal policies and
repressive regulatory regime in the wake of the 2008 recession.
The Fed then increased the federal funds rate during the Trump administration
until the 2020 Covid lockdowns. Trump’s tax cuts and regulatory reforms
stimulated economic activity and raised wages – bad news! – so the Fed applied
interest rate hikes to keep people from wanting to buy too many goods and
services and presumably unleash inflation. The economy expanded anyway, because
Trump’s supply-side reforms unleashed greater production of goods and services.
After the record-swift recovery from the Covid depression during Trump’s final
year in office, President Joe Biden and the congressional Democrats engaged in a
spending spree ostensibly intended to stimulate the economy, which was already
expanding nicely. The Fed added accelerants by keeping interest rates at
near-record lows, and Biden went on a regulatory binge that throttled
investment. Those irresponsible decisions pushed inflation to levels not seen in
more than 40 years. Now the Fed craves a good, hard recession to make everything
better.
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“The Fed is operating on the assumption that the only way to get inflation down
is with decreased demand. And the only way they’re going to do that is if the
unemployment rate ticks higher,” Thomas Simons, an economist at Jefferies
Financial Group Inc., told The Wall Street Journal.
Uh-oh: new claims for unemployment compensation fell slightly during the last
full week of October, the Department of Labor reported on Thursday.
That is awful news, according to the Fed.
“The broader picture is of an overheated labor market where demand substantially
exceeds supply,” Fed Chairman Jerome Powell had told the press on Wednesday.
This is a particularly destructive line of thinking because unemployment is a
lagging indicator: it rises after the economy has begun to slow, not the other
way around. Relying on unemployment to indicate economic tightening is like
seeing ice-skaters as a harbinger of cold weather.
In hoping for a “real softening” of the labor market, Powell is channeling his
inner Paul Volcker, the Fed chair from 1979 through 1987, who has been lionized
for beating inflation by raising interest rates radically – as high as 22
percent – and bringing on two deep recessions.
Volcker, however, had the benefit of pro-market federal government policies
absent today. Congress and President Ronald Reagan lowered federal taxes and
carried out much-needed economic deregulation. That enabled the American people
to increase the amount of goods and services they produced, which resulted in
strong, steady economic growth.
Relying on the Fed to reduce inflation created by high government spending and
tight economic regulation damages the economy without solving the underlying
problem, which is the dead weight of government that is holding down productive
enterprise.
The real solution is for the federal government to return not to Volcker’s
recession-inducing rate hikes but to the pro-market policies of the Reagan
administration.
Fortunately, upcoming GOP control of the U.S. House of Representatives provides
an opportunity to put the brakes on Biden’s bizarre plan to destroy the nation’s
economy. With a president who gleefully states his intention to cancel the
Industrial Revolution, the American people desperately need the checks and
balances of a more-sensible Congress to ensure that does not happen.
S. T. Karnick is a senior fellow and director of publications for
The Heartland Institute, where he edits Heartland
Daily News.
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