It’s a slow week for the Fed as they gear up for next week’s FOMC meeting and subsequent announcement. In the days ahead, there will be much commentary about whether or not the Fed is going to raise rates.
For example Tim Duy, who is always happy to support the Fed’s inflationary excesses, is worried about the strength of the economy in the case of “excessive monetary action.” What he means by this phrase is not the quadrupling of the Fed’s balance sheet since 2008, but rather a small tick upwards in the Federal Funds target rate. He doesn’t want the Fed to continue “tightening” and refers to this as excessive action.
This framework of the Fed’s letting interest rates rise (by not expanding the money supply by as much as previous) as being excessive action implies that it is somehow less excessive (more “normal”) for the Fed to keep interest rates low. This is the exact opposite of the reality of monetary policy in light of monetary theory. In a world without monetary interventionism in which a central bank can simply buy assets (with money created out of thin air) and suppress interest rates, the money supply would tend to remain relatively stable. Interest rates would rise and fall in accordance with the time preferences of lenders and borrowers on the market.
It is the central bank’s intervention (”monetary action”) that causes interest rates to be forced artificially low. If the Fed let go and stopped “acting,” if they let the money supply correct to its natural levels, if they let the malinvestments liquidate, interest rates would likely spike. It is not “excessive monetary action” that characterizes rising interest rates in a recessionary scenario but rather it is the suppression of those interest rates that is the example monetary action.
The Fed letting go of the economy’s reigns, the opposite of monetary action, is recessionary because it was the Fed’s monetary interventionism which created an artificial economic boom in the first place. Of course, this is not a case against the Fed letting go, for the recession is badly needed so that prices and the capital structure can properly adjust.
The Fed keeps interest rates low by continuing to intervene in the market. That is where the true excessive monetary action lies, and this is the source of our true economic woes.
