Say what you want about Donald J. Trump, but he is correct about one thing: the Federal Reserve has, with near certainty, been holding interest rates down for political purposes — namely, to aid Hillary Clinton in getting elected president of the United States.
In September’s first presidential debate, Mr. Trump said:
We have a Fed that’s doing political things. … The Fed is [being awfully] political by keeping the interest rates at this level. And believe me: The day Obama goes off, and he leaves [office], and goes out to the golf course for the rest of his life to play golf, [is the day that] they raise interest rates. … The Fed is being more political than Secretary Clinton.
The Federal Open Market Committee’s (FOMC) September meeting minutes, released on Wednesday, have proven Mr. Trump’s assertion to be true. As the 2016 election season draws to a close, the Fed has suddenly become more bullish on the prospect of raising interest rates — and this precipitous change-of-heart has come despite there being few notable signs of hope in the US’s economic data.
The meeting minutes detailed one FOMC member’s worry that low interest rates are unfairly hurting investors, particularly those with pension funds and endowments, and that these easy-money policies may be “depressing” economic growth:
One participant expressed the view that prolonged periods of low interest rates could encourage pension funds, endowments, and investors with fixed future payout obligations to save more, depressing economic growth and adding to downward pressure on the neutral real interest rate.
But the buck didn’t just stop here. Others repeated the (false) assertion that the Fed’s easy-money policies will inevitably tighten the labor market:
A few other members were concerned that, without a prompt resumption of gradual increases in the target range for the federal funds rate, labor market conditions could tighten well beyond normal levels over the next few years, potentially necessitating a subsequent sharp tightening of monetary policy that could shorten the economic expansion.
Remarkably, members even feared that continuing with these artificially low rates will generate too much debt and fuel unsustainable economic bubbles:
A few participants expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the nonfinancial corporate sector.
Don’t get me wrong: the fact that the Fed has finally demonstrated some hawkish instincts is relieving, but why did the FOMC fail to express concern about any of these consequences earlier in the year?
The FOMC meets regularly — this year, it has met in January, March, April, June, July, and September. If you have read through all of the meeting minutes like I have, you have noticed that while the committee has maintained that it will likely raise rates by the end of the year, there have been very few times in the previous five meetings that members have said anything negative about the Fed’s current low-interest rate policies.
Instead, Fed officials have given excuses to prolong the day of reckoning — among them: low inflation, slowdown in China, and a collapse in oil prices. These excuses have led the four predicted rate hikes for 2016 to decline to just one that may conveniently come in December — right after the November elections.
Economic analysts should find the Fed’s tune-change regarding its easy-money policies odd, especially given the fact that there have not been any significant upticks in the Fed’s leading economic indicators — indicators that the Fed once said a rate hike was dependent upon.
The Atlanta Fed recently reduced its estimate for third quarter GDP to 1.9 percent, just half of its earlier 3.8 percent prediction. “This is the weakest three consecutive quarters of this so-called recovery, yet now is when the Fed is supposedly set to begin raising rates?,” asks Austrian investor Peter Schiff.
Moreover, the Job Openings and Labor Turnover (JOLTS) report — Janet Yellen’s favorite indicator of the labor market — was also released on Wednesday and showed that US job openings have fallen to their lowest level in 8 months.
“Everything about that report was weak,” said Schiff. “If this is Janet Yellen’s favorite number, and if the Fed didn’t raise rates in September because they wanted more data on the job market … [well] now they got the JOLTS number, which was much worse than expected. Why, then, is every Fed governor now talking about rate hikes?”
So what gives? Why the significant shift in opinion among committee members?
Clearly, the Fed has known all along that Mr. Trump is right — we are living in a “big [economic] bubble” that must be popped. Rates should have been raised a long time ago, but Fed officials have been using a fraudulent data checklist to hold them down, possibly in order to give Democrats like Hillary Clinton — the darling of the Federal Reserve — the upper hand in the November elections.
It is no secret that the Fed — a so-called independent central bank — leans left. Two weeks before the 2014 elections, Janet Yellen gave a passionate speech on income inequality, then a major talking point of Democrat candidates. This year, Hillary Clinton received over four times more in donations from Federal Reserve officials than every other Republican and Democrat presidential candidate combined. Fed Governor Lael Brainard — who many believe may have a potential appointment waiting for her in the Clinton administration — has donated the legal maximum to the Clinton campaign.
Fed officials feared that a tightening of monetary policy before November would create some semblance of a market correction mechanism, leading to some short-term economic pain. This would have given Republicans the fuel that they needed to blast the Obama administration’s reckless fiscal and monetary policies, as well as criticize his phony economic recovery.
The Fed argues that this isn’t true — they haven’t refused to raise rates for political reasons; they’ve merely been trying to better assess the labor market. In fact, when asked on Friday why the Fed hasn’t raised interest rates yet, Fed chairwoman Janet Yellen said, “the events of the past few years have revealed limits in economists’ understanding of the economy and suggest several important questions I hope the profession will try to answer.”
Even if this is true, and the Fed has failed to raise interest rates not for political reasons, but because the body lacks an adequate “understanding of the economy,” this begs another question: should a handful of imperfect bureaucrats in Washington really be in charge of setting the rules related to money and credit for our nation?
Still, the timing of the Fed’s sudden change-of-heart on low interest rates does seem rather odd. Just a few weeks before the November elections, Fed officials are now defying their old data standards by proclaiming that they will raise rates “relatively soon,” while nearly 74 percent of economists believe that the Fed will raise rates come December — the first chance that they will have to do so after the elections.
Coincidence? Mr. Trump thinks not, nor do I. Fed officials are oftentimes wrong, but they are far from stupid.
Tommy Behnke currently works for a public relations firm in Washington, D.C. He is the former press assistant for the Rand Paul for President campaign.
