Why the Fed’s historic rate hike is good news and bad news for the economy. Yellen says rate hike shows Fed’s confidence the U.S. economy is strengthening … — LA Times
Dominant Social Theme: The Fed takes care of the economy, and this is the way it must be.
Free-Market Analysis: The good news is that the economy is recovering, according to this article. The bad news is that the Fed has started the clock running on the business cycle once again. As rates go up, economic activity gradually slows.
Aware of this as she must be, Janet Yellen has made a point of pledging that the Fed will not move too fast raising rates. Fed officials will do so, she confirms, only when the data shows hikes are warranted.
One catch: Is the data trustworthy? Obviously, Yellen thinks it is. Here’s some more from the article:
The major significance of the long-awaited rate increase could be more psychological. Yellen described the hike as a major turning point in the nation’s efforts to put the Great Recession behind it.
“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Yellen said.
“It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of millions of Americans.”
This was apparently the reason the hike was so important and why the Fed struggled to mightily proclaim it. The Fed persevered because a statement needed to be made.
From the point of view of Fed officials, the ability to declare a hike provides evidence that the system works and that a handful of individuals can indeed make decisions to benefit billions of people around the world.
Of course, there are alternative viewpoints regarding the Fed, and we mentioned one significant perspective yesterday in an article that compared the Fed to the politburo.
The politician making the comparison was Rand Paul, who is currently running for president as a libertarian/conservative.
Rand’s main point – one we have made many times – is that central banks fix the value and volume of money via interest rate manipulation. He wondered how it was possible that academic and media observers could look at the facility with approval, considering the negatives of price-fixing are widely known.
But there are other negative assessments of the system and its operations. In a recently published article entitled, “What Does Today’s ‘Rate Hike’ Mean?”, Paul Craig Roberts provides us with one specific way that setting a rate hike benefits some institutions at the expense of others.
First, he establishes, shockingly, that there is plenty of liquidity in the system and that monetary demand did not drive up the price of money. “The purpose of raising interest rates is to choke off credit demand, but there was no need to choke off credit demand when the demand for credit was [mild].”
He then makes an even stronger statement:
This “rate hike” is a fraud. It is only for the idiots in the financial media who have been going on about a rate hike forever and the need for the Fed to protect its credibility by raising interest rates.