The Nonsense Surrounding the Federal Reserve

So, I’ve already spent a couple days beating up on President Biden’s terrible and dishonest big-government socialism State of the Union message, and then there’s his dishonest distraction about Republicans cutting Social Security and Medicare. It’s dishonest because it’s not true, and it’s a distraction because he’ll do anything not to talk about Republican efforts to restrain his inflationary spending spree of the past two years. Mr. Biden, of course, never mentioned his debt talks with Speaker McCarthy, so who knows whether there’s going to be a second meeting or a serious negotiation. Right now, Mr. Biden is not serious — doesn’t look serious, doesn’t sound serious — and that’s why his poll numbers keep dropping. In fact, it’s why polls are showing nobody really liked his speech. Thirty-eight percent of those polled had a “very positive” reaction to his address. To put that in context, 50 percent had that reaction to President Obama, while the number was 53 percent for President George W. Bush and 54 percent for presidents Trump and Clinton. So Mr. Biden’s not kidding anybody with his antics. I want to turn briefly and be a little bit technical about the Federal Reserve. It is fighting inflation, but I’m worried it may overdo the effort. The latest Fed mantra, echoed of course by Wall Street, is that it has to tighten much, much more, because financial conditions are easing. This is nonsense. For one thing, as Joe Lavorgna has pointed out, the Fed is focusing on the wrong measure of financial conditions. The recent rally in stock prices and the decline in long-term interest rates don’t mean the Fed is failing. In fact, they mean the Fed is actually succeeding in reducing inflation fears and actual inflation. That’s why bond yields have dropped, and one reason that stock prices have improved really going back to last October. I don’t mean to be too technical and in the weeds, but Fed rate hikes have jacked up household borrowing rates to more than 7 percent. This includes credit cards, mortgages, personal loans, student debt, etc. More than 7 percent puts it back to the level of the financial meltdown recession in 2008 and 2009. It shows financial conditions for consumers are very tight, not easing. In addition, the Federal Reserve survey of bank loan standards shows a big tightening in lending standards for C&I business loans, and the same for commercial real estate. That’s the stuff the Fed should be looking at. And those lending conditions are already sufficiently tight. Let me add a few more pictures for you. There has been a crash in the M-2 money supply, and a plunge in the index of leading indicators. These are powerful recessionary signals. Finally, we have a picture of the CRB commodity index, which shows a big drop-off last spring, and it’s been flat at the lower level for about six months. Commodity indices are a leading indicator of inflation, and they also show that the commodity value of the dollar is now steadied and stabilized. Another positive sign for lower future inflation. The Fed may have a little more work to do on getting its target rate up a wee bit, but if it doesn’t look at the right indicators, it’s going to make a very big mistake. Finally, speaking of mistakes, if Mr. Biden wasn’t such a disciple of Bernie Sanders, he would understand why raising taxes and the chronic over-regulation from his posse of central-planning bureaucrats is doing great harm to the economy. It may sound great for Lenin or Castro or Xi Jinping, but blaming rich people and businesses will not incentivize the kind of investment that our economy needs. Here’s a thought, President Biden. It is businesses that hire people and pay them. Your trouble, sir, is you like employment but you just don’t like the employers. Save America. Help business for a change. From Mr. Kudlow’s broadcast on Fox Business News.

The Nonsense Surrounding the Federal Reserve

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