As expected, the Fed announced a hike for its key interest rate on December 16, 2015. The rate has been near zero for 7 years.
I have been harping on the fact that the only way the Fed could raise the federal funds rate is by paying a higher interest rate on bank reserves. This is exactly what happened, as the Fed will now pay banks 0.5% (instead of the previous 0.25%) for their reserves.
I go into further depth on this subject in this article. It basically amounts to more bank welfare.
The base money supply, as shown by the adjusted monetary base, has been steady for just over a year. The Fed has been in tight monetary mode since it ended QE3 in October 2014. The recent hike in its key rate will not do much, except perhaps curtail bank lending a bit more.
We are at a high risk for a recession. The Fed may get blamed for this. It should get blamed, but not for the reasons it will get blamed by most people.
It isn’t the Fed’s tightening that will cause the recession. This will just speed it up. It was the extremely loose monetary policy from 2008 to 2014 that is the cause. This has severely misallocated resources and caused an unsustainable boom – even if it is a weak boom at that.
Some critics of the Fed like to say that the Fed does the bidding of the executive branch. But this isn’t really true at all. The Fed does the bidding of the bankers, as it has shown again and again. Secondarily, it helps Congress (and the president) run deficits at lower rates. Without the Fed or a central bank, there is no way the Congress could spend as much as it does, especially without being funded with taxes.
Yellen and company are in tight monetary mode. They are handing essentially free money to the banks, but they are obviously not concerned about Obama. Even more so, they are not concerned about Hillary Clinton.
The Fed’s current policies make a recession more likely in the first 9 months of 2016. I am not saying that it will surely happen, but just that it is more likely. If there is a recession before the general election in November, this will hurt Hillary Clinton more than anybody, assuming that she is the Democratic Party’s nominee.
Since Obama is in the White House now, he will take a large share of the blame for a recession, even though it has more to do with the Fed and monetary policy than anything else. But that is the way politics works. Since Obama is a Democrat and Hillary is a Democrat, voters – on the margin – will vote for the other party if the economy is really bad.
I think Obama would have beaten John McCain anyway in 2008, but the huge downturn in the economy just prior to the general election solidified this.
Even though Yellen was appointed by Obama, her primary concern is not helping Obama politically. Again, her primary concern is the big banks. After that, if she is doing anyone’s bidding, it is more the general establishment than Obama himself.
The Fed is dealing with a balancing act of trying to prevent price inflation and a busted economy. It has the price inflation part under control right now, but it is going to get more difficult, as the balance beam gets continually smaller. The Fed is not too worried about Obama’s poll numbers or whether or not Hillary Clinton gets elected president.
If Fed officials are worried about anyone’s poll numbers, it is their own. The Fed takes more criticism now than ever before, thanks to Ron Paul and social media.
This recent rate hike may not mean a lot, but a recession is becoming a good possibility for 2016. This will hurt Hillary if it happens soon enough. It will hurt Janet Yellen.
The Fed will start QE4, or whatever it is called. It will be in panic mode to save the economy. Fed officials will be concerned about their reputation, not the reputations of Hillary Clinton or Barack Obama.