The Fed Should Do Its Job

and only its job.

Before the Federal Reserve actually renders its decision about whether to raise interest rates or not, I think I’ll give my opinion. I see little evidence of inflation. If anything deflation is beginning to take hold in earnest. Commodities are falling price. Most goods are falling in price. Gold has fallen in price. Oil has fallen in price.

Some services are continuing to rise in price, specifically healthcare and education, but in my view that’s due to government mismanagement. Indeed, in the cases of healthcare and education that’s practically definitional. However, I believe that the solution to government mismanagement is better government management rather than no government management. But that’s not the Fed’s job.

By law the Federal Reserve has two mandates. First, it has the mandate of maintaining stable prices. Second, it’s supposed to maximize employment. Here’s the actual statutory language from the Federal Reserve Act as revised in 1977:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.

I do not believe, however, that it’s the Fed’s job to “run the economy” as it’s sometimes put. It’s also not the Fed’s job to ensure that the stock market always rises. And it’s definitely not the Fed’s job to ensure that the Chinese stock market always rises.

I completely recognize the havoc that persistent low interest rates are playing in the economy. You can hardly open the newspaper without reading about public pension crises, direct consequences of persistent low interest rates. And, as I’ve noted before, there are two ways of making money in the insurance business: the insurance business and shrewd money management. There are strict limits on how fast and how high companies can raise premiums which makes it much harder to make money in the insurance business these days than it used to be. As insurance comes to be seen as a right (which means it’s not insurance any more), it will become that much harder. And with limits on what companies can do with the premiums they must hold in reserve to pay off claims. Persistent low interest rates makes it hard to make money that way, too. Those are some of the reasons the insurance companies are squawking.

Given that context I see little cause for the Fed to raise interest rates to fulfill its mandates but lots of reasons for the Congress to start mitigating the risks that persistent low interest rates have produced. Interest rates have been, essentially, zero or less than zero at least since February of 2009 and arguably since February of 2008 which makes the latter a matter of some urgency.

Time’s a wastin’.

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