Daily Archives: 26 August 2015

Panicky Central Planners

Posted on by
2

…and maybe pundits, too.

For the Federal Reserve, the aftershocks threaten to set back its path to interest-rate normality yet again….

That’s how Alex Frangos and Justin Lahart opened their Wall Street Journal piece Monday, writing of the People’s Republic of China’s (second in a month) “market” meltdown last week and with it the demonstration by the PRC’s economic central planners and their panicky twitchings with interest rates, bank reserve requirements, market interventions, and the like that, once again, central planning cannot seriously impact economies for longer than the moment.

Never mind that the PRC has little impact on the global economy—as Frangos and Lahart themselves note, PRC imports from the US run to 1% of our GDP and all of 2% of the S&P500 companies’ revenue are PRC-related. The situation is little different for Europe: most of those nations’ economic interactions with the PRC represent roughly 1% of their GDPs as well.

They added this to their fandango:

September is still on the table for the Fed, but markets will need to calm before then.

No, they don’t. The markets aren’t the underlying economy. The markets are tied to the economy by a stout rope, but that rope has large and nearly randomly variable slack. The underlying economy, slow as the Obama recovery has been, nevertheless is in solid territory, and as Frangos and Lahart themselves concede, “a US recession led by China doesn’t look to be in the cards.”

The Fed needs to move on the longer-term state of the economy, not on the short-term, animal spirit vagaries of the markets. The Fed needs to stick to a plan—any plan—and move interest rates up on schedule, which means in September. Or better, loosen and then release controls, letting interest rates float in those same markets—which for all their animal spirits influence still are better at “managing” a free market economy than any central planners, including those at the Fed—determine the appropriate interest rate levels.

And this:

[T]he Fed’s problem with China is what it will do to a pace of US inflation that already isn’t anywhere close to its 2% target.

No, again. The Fed’s problem has nothing to do with the PRC. The Fed’s problem is that US inflation isn’t anywhere close to its 2% target, and it’s not going to get there anytime soon. Interest rates are intrinsically inflationary; the only way to move our present inflation rate to 2% is to raise/let rise interest rates to levels consistent with 2% inflation rather than continuing to suppress the one (and so the other) to artificially low levels.

Market Timing

Posted on by
1

Gerald Driscoll, Senior Fellow at the Cato Institute and former vice president at the Federal Reserve Bank of Dallas, thinks the Fed should engage in market timing regarding its planned short-term interest rate hike in September—a planned move that he actually calls a course change.

The world markets are in turmoil, he worries, and the Fed should delay its planned hike. Why raise rates now, he asks.

Why not now? Well, the inflation rate doesn’t justify a monetary tightening, he says.

Well, raising interest rates now—or in September as the Fed has said it’s ready to do—from their current suppressed-to-artificially-low rates, and bringing them closer to rates more consistent with the Fed’s price stability goal of 2% inflation isn’t monetary tightening. On the contrary, that would be controls loosening. Letting the market determine interest rates will spur economic growth and national—and individual citizen—prosperity.

Low interest rates were thought to be stimulative. But we have learned that financial intermediaries struggle with spreads in a low-interest-rate environment.

Indeed. Many of us have learned also—and the Fed should have learned this, too—that we all struggle with artificially low interest rates: they’re inconsistent with a robust economy.

The Fed isn’t any better at market timing—at predicting the actions of animal spirits—than any other institution or collection of skilled investors. The key to prosperity is discipline, sticking to a plan even when things seem momentarily uncomfortable.

The Fed should be disciplined and stick to its plan. It shouldn’t try timing the animal spirits.