Economics: The President is Wrong, The Fed Must Continue Her Interest Rate Hikes

(Drivebycuriosity) - The Federal Reserve Bank announced more interest rate hikes for the rest of the year. Last week Donald Trump criticized the Fed`s policy."He is not thrilled about rate hike", he complained (politico).  The President is wrong, the Fed must continue her policy of interest rate hikes. The still very low interest rates don´t fit to the changing economic environment.  US economic growth accelerated in Q2 to about 4.5%, a reason to be thrilled ( frbatlanta). Accounting for inflation, the Fed`s interest rates (Fed Funds) are still negative (macro ), which doesn`t make sense anymore. The Fed has to adapt her interest rates gradually to the growing economic strength otherwise the economy might overheat. 

Inflation is already cooking up, driven by rising oil prices (charts  below). The Fed has to counter inflation early otherwise inflation could get out of control. If the central bank responds too late to an escalating inflation they would have to fight harder to break the inflation mentality, meaning sharp interest rate hikes in the future. Recessions are often caused by the Fed who is fighting inflation too late.

 

If the Fed would stop hiking, the still low interest rates might encourage the hedge funds to take more (cheap) loans and to pump this money into oil futures which would accelerate the already strong oil price upwards trend. If the Fed doesn`t make her loans more expensive then oil speculation might heat up - like in 2007/08 as oil prices tripled - and could cause again a severe recession. Sharp oil price hikes are another frequent cause of recessions.

If the Fed would stop hiking, the market might interpret this as weakness which could send the dollar south. This would lift import prices (and the price of oil) and fuel inflation even more. Timely interest rate hikes are the best way to avoid too high interest rates in the coming years and so to avoid another recession. Better safe than sorry.