Federal Reserve

Fed Officials Will Continue Interest Rate Hikes in Face of Booming Economy

Minutes from the Fed's June meeting indicate that it will continue gradual interest rate hikes.

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Joshua Roberts/REUTERS/Newscom

The Federal Reserve plans to continue its consistent increases in interest rates. This may pour cold water on President Donald Trump's hope for high economic growth.

The minutes from the Fed's last meeting were released to the public yesterday afternoon. They indicate optimism about the economy's strength, with consumer spending, capital expenditure, and employment all increasing. But concerns about a possible recession are not absent.

Fed officials perceive some business uneasiness regarding trade policy—unsurprisingly, since the White House's most recent round of tariffs could easily spark a destructive trade war. Some of the Fed's business contacts have already cut back on production because of the new tariffs. But unless the trade war gets completely out of hand and severely depresses economic growth, the White House's approach to trade will probably have little impact on monetary policy. Fed officials think Trump's "recent fiscal policy changes" may "lead to a greater expansion in economic activity over the next few years than the staff projected."

The Federal Reserve has met its goal of a 2 percent inflation target. Some of the meeting's attendees fear inflationary pressures and a possible recession. This worry that the economy could "overheat" is based in flawed reasoning, but below-market interest rates can indeed promote unsustainable economic growth, which is something to watch out for.

Discussion of the Fed's enormous bond portfolio was noticeably absent. In the wake of the 2008 recession, this portfolio grew from less than $1 trillion to a monstrous $4.5 trillion; Fed officials began to shrink it last year, looking to bring it down to $3 trillion by 2020.

Most importantly, the Federal Reserve will continue its gradual interest-rate hikes, looking eventually to reach the neutral rate of interest, where the central banking system will neither promote nor slow economic growth. It's unclear whether the Fed would allow the rate to go beyond neutral rate estimates, which may be reached as soon as 2019.

Though the neutral rate is difficult to determine, moving closer to it would do us all a favor by ameliorating the severity of future recessions. Ideally, market forces would point us to the neutral rate, but for now we're stuck with the guesstimates of central bankers.

NEXT: Trump Blasts Anonymous Sources, Was Himself One for Years

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  1. Wait…I thought the trade war had destroyed the economy…

    1. It’s certainly not helping things. What’s your point, exactly?

      1. It was supposed to cause the next great depression. How is that working out?

        1. Who made that claim?

          1. Ben Stein. Don’t you know the gospel of Ferris Bueller?

  2. Whenever I read someone talking about the fed holding down/hiking interest rates, especially within the context of current times, I always think of this blog: https:// http://www.alt-m.org/2016/12/01/fed-h…..est-rates/

    I haven’t been following things that closely, but I have the feeling it might just be the tail wagging the dog again.

    1. Click the second half of the link, I had to add a space because of Reason’s dumb 50-char limit per word.

      1. You can either use html to link or delete the “s” from https
        Reason’s comment platform doesn’t limit the length of http links.

        1. I’m sorry that I tried to read that gobbledygook. It makes no sense.

          1. Maybe you could explain how it made no sense? You’re not putting forth a very convincing argument.

  3. The Fed has been destroying the value of the dollar and screwing savers with artificially low interest rates going back to the 1990s. These rates are long overdue to come up.

    1. I think you should really read the link I left above. The most recent bout of really low rates may have actually been the natural rate. Under normal circumstances this would never happen, but the fed fucked things up so bad earlier in the decade that it is how things ended up working out.

      1. In attributing low interest rates to low “natural” rates, rather than to the Fed’s large-scale asset purchases, I don’t mean to absolve the Fed of blame for those low rates. On the contrary: I, too, hold the Fed responsible, to a considerable extent, for the fact that rates have been low. I just don’t believe that it made them so by pumping too much money into the economy.

        As we’ve seen, rates originally crashed, not because monetary policy was too easy, but because it was too tight. The Fed erred, in other words, not by pushing rates down but by trying to prop them up in the months leading to Lehman’s collapse. Wicksell’s theory is once again relevant. Just as that theory holds that, in order to keep interest rates below their natural levels, a central bank must resort to ever more aggressive monetary expansion, it also implies that a central banks that strives to maintain an excessively high rate target will, by over-tightening, cause spending (or, if you prefer, aggregate demand) to decline. That decline will in turn place downward pressure on market rates, by reducing the nominal demand for funds. The pressure then inspires further tightening, and so on, until the central bank finally relents. The Fed’s efforts to keep rates from approaching the dreaded zero lower bound thus ended up backfiring. Like Oedipus, it appeared fated to achieve the very outcome it desperately wanted to avoid.

        1. Rates from the Fed did not cause the bubble. Banks committing fraud caused the bubble. Ratings agencies not performing well caused the bubble.

          It’s not the job of the fed funds rate to prevent bubbles. The fed funds rate is to balance steady inflation with full employment. The Fed does have oversight over banks, that was somewhat fractured prior to the bubble with other, even more ineffectual oversight agencies. This was somewhat corralled with Dodd Franks, however that protection has been limited by the Republicans.

          Inflation was low in the 2000-2008 cycle.

          1. I never said the fed being too loose was the only reason. Just that they “helped fuel” it, by pushing rates too low earlier 00’s.

            Then conversely later they were too tight when the market’s natural response was for them to go even lower when the subprime bubble started to burst.

            1. Basically I’m saying they “made it worse”. Not that “they caused it”.

      2. That is true. The rates were low because they pumped so much money into the economy. What Greenspan did to the economy was a crime.

        1. Well I’m not talking about the 90s. I’m talking about 00’s and 10’s.

          QE wasn’t what was actually keeping rates low post Lehman.

          Also, pretty much every fed “move” post Lehman, has been the fed reluctantly following what the market (interbank rates) were already doing. I’m merely wondering if this recent “hike” is just more of the same.

          They’ve basically lost all control since then.

          1. Oh, well yeah.. early 00’s he did help fuel what became the housing bubble.

  4. The US Government sets the trade policy.

    The Chinese Communist Party sets the trade policy.

    The EU Committees set the trade policy.

    Trump at least wants free trade where the TOP MEN dont decide every facet of trade.

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