The headlining article at money.cnn.com yesterday was titled Did the Fed go too far?, asking whether or not the Fed was prudent in hacking our Fed Funds Rate all the way down to 2%. I’ll save you some time and skip to the end of the story: yes. Yes the Fed did go too far. But they ALWAYS go too far. They almost have to.
As much as we like to think of ourselves in this country as a shining beacon of sense and logic, we really are very prone to mob-mentality. When the media gets us all whooped up over an economic slowdown, we start demanding that the government (in this case, those that decide monetary policy) fix everything or else we’ll kick them out and find someone else who will.
It’s a lot like when any of us gets in the shower. We turn the water on and crank it all the way to the “hot” side because we are impatient and we want the hot water now. Of course, when the hot water finally starts to spray out, it’s way too hot and we’ve got to crank the dial further back to the “cold” side until we find a good balance. Well, by dropping the Fed Funds Rate all the way down to 2%, our Federal Reserve has essentially made the monetary “water” too hot. Now, we’re feeling the burn of inflation.
The question we are now faced with is whether or not we should cool things off by raising rates at this week’s Federal Open Market Committee meeting to battle inflation or leave them alone to help prop up our sputtering economy.
My opinion: if the Federal Reserve opts to raise rates, they are living in a delusional state that I can’t even conceive of. Here’s my three reasons.
Number one: Guiding our economy via monetary policy (the toggling of key interest rates and money liquidity) is like trying to steer a naval aircraft carrier. You can’t just turn the wheel and expect immeÂdiate results from a behemoth economy like ours. So, we need to give the rate cuts some time to mend our weakening housing sector and rising unemployment.
Number two: Monetary policy can’t do a whole lot to stop the increase in oil and commodity prices that are the largest forces driving inflation. Sure, we can shore up the dollar’s strength, but any benefit of that will, short-term, be eaten up by the decrease in exports that rely on a currency imbalance. The central problems are systemic and need to be addressed through foreign relations as opposed to interest rate hikes.
Number three: We’ll look really dumb as a country. Reversing monetary policy after our recent rash of aggressive rate cuts would send a clear signal that we do not have this bus under control. That would undermine international confidence in America and bring to life a whole host of new problems.
All that being said, exports are getting more expensive as the commodity boom continues unabated. We will eventually need to increase rates once we see a bit more stability in our economic recovery. But not yet, Big Ben. Not yet.