It is looking increasingly likely that the Federal Reserve will raise interest rates soon; however, inflation remains low and economic output remains below desired levels. Logic would seem to dictate that this is not the ideal time to raise interest rates to bring inflation or growth under control. Then why is the Fed under pressure to raise rates?
The Fed has run out of policy tools, and they are concerned they will have nothing with which to fight the next recession. They appear to believe that economic conditions will not improve much more significantly, and they are likely right. The Fed has done all it can to better the economic situation of the United States, and now they need to stop concentrating on the present and focus on future battles.
Has the Fed done a poor job at fostering an economic recovery and simply given up? Not at all. The Fed has done everything it could possibly do, and may have even gone beyond traditional measures with their quantitative easing program. The Fed is limited in what it can do. We forget that economic stewardship lies with two bodies, monetary policy (overseen by the Fed), and fiscal policy controlled by the Congress. If the economic recovery is still stuck in the mud, blame Congress!
Monetary policy is the control of the money supply. Fiscal policy is the control of the US budget and laws surrounding the economic policies of the United States. Does fiscal policy really make that much of an impact on the economic well-being of the country? We have several local examples that make this point clear. Take for example, Deadwood, SD. All the gaming, hotels and restaurants in this town exist purely from the fiscal decision of the SD legislature to allow gambling in this one community in the State. And, look at the oil boom in western North Dakota. The State of New York banned fracking, which will prevent any future oil boom in that State, but the State of North Dakota has chosen to allow and manage it, making such large infrastructure investments and job growth possible. Even the city of Sioux Falls, SD has seen enormous growth due to South Dakota’s unique banking laws.
On a national level, you can see the results of fiscal policies with such programs as “cash for clunkers” or tax breaks for energy efficient home purchases. These policies created large positive impacts on specific industries.
If we are not seeing more national economic growth, it is because Congress is failing to implement policies that foster economic expansion. And as we know, Congress has passed a record minimal amount of legislation in the past few years.
When we step back and compare monetary policy and fiscal policy, it appears fiscal policy makes much more impact in creating jobs and expanding businesses. Monetary policy (the Fed), is really more of a thermostat to the house where the economy lives, and it can turn on the air conditioner when it is hot, or turn on the furnace when it is cold. But, it is Congress who installs the air conditioner and the furnace. If these appliances are not working appropriately, there isn’t much more the Fed can do to regulate the temperature.
It seems strange the Fed wants to raise rates right now, but they have little choice. They can’t do anything more by themselves to improve the economy. The failure of Congress to act or do more to promote economic prosperity is the true reason behind our dull economic recovery.