In one of the most remarkable Abbott and Costello routines in modern times, the economic wizards at the Fed again raised interest rates on Tuesday. Their crackerjack logic for doing so is to steer America on a course toward recession so they have the tools in hand to end the recession that they themselves created. Can anyone tell us who's on first?
Worse, this Fed move doubles down on its blunderous interest rate rise in September. President Donald Trump turned out to be exactly right: The central bank pullback on money would slow growth and crush the stock market in order to combat nonexistent inflation.
The Fed had already reduced the monetary thrust that it provides to the economy eight times since Dec. 15, 2015, by raising its federal funds interest rate from 0.25 percent to 2.25 percent. Each time, the Fed claimed that it needed to guard our economic airliner from inflationary "overheating" -- as if its job is to prevent too many people from working and to make sure that paychecks aren't rising too quickly.
Unfortunately, if you cut engine power too far on a jetliner, it will stall and drop out of the sky.
On Wednesday, Dec. 19, despite the numerous market-based alarms that were sounding in the cockpit, Federal Reserve Chairman Jerome Powell and his co-pilots on the Federal Open Market Committee, a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation's open market operations.
Powell has been entirely tone-deaf to the financial markets he seeks to protect. The Dow Jones Industrial average, which had risen by 382 points on hopes that the Fed would listen to Trump and stop cutting power, plunged by 895 points after the 2 p.m. announcement, and closed the day down 352 points (1.49 percent). Poof. Trillions of dollars of wealth vanished.
The Fed economists use twisted logic that the economy is "strong enough" to absorb the rate hikes -- which is simply an admission that their policy will slow growth.
Can someone at the Fed please explain how falling commodity prices indicates inflation? Inflation is too many dollars chasing too few goods.
The commodities index is about the only readout that a monetary pilot truly needs.
And right now, the CRB Index is blaring, "Pull up! Pull up!"
Powell warned of a slowing economy in 2019, but he failed to acknowledge that the headwinds the economy is facing are the drag the Fed is itself creating. It was almost as if the Fed believes there is some weird Puritan-like virtue to slowing down the investment, employment and wage-growth spurt Trump policies have created.
What is to be done now? Trump wants to fire the Fed chairman, though it is doubtful he has the authority to do that. Much better for Powell to do the honorable thing and admit that his policies have had disastrous economic and financial consequences and resign.
For much of the past two decades, America's economic problems of slow growth and flat wages were due to the drag of fiscal and regulatory mistakes. Now, at the very moment in time when we finally have a president who is slashing tax rates and regulations and is making America a much more business-friendly nation, the Fed's monetary policy has come unhinged.
Cockpit warnings have been sounding for months, not only from the markets but also from Trump and many other growth economists. We are now suffering the financial ramifications of this "pilot error" on the part of Powell.
Time for a new pilot at the Fed.