The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
Subscribe to the Flinchum File
View Archives

Oh, What A Relief It is . . .

During the Era of Gridlock, the United States was a one-armed boxer.  Gridlock made fiscal policy useless, as Congress was unable to do anything that mattered.  All we had was monetary policy, which is controlled by the Federal Reserve.  Therefore, Wall Street held its breath every time the Fed met to decide any changes.  If the Fed did anything unexpected, Wall Street invariably over-reacted.

Next week, the Fed will meet and is expected to raise interest rates.  Before the election, the stock market would have taken a swoon.  Now, we realize that increased interest rates are both needed and acceptable to investors.  This is a healthy sign.  It will actually be a relief to be able to raise rates without the market over-reacting!

When the Fed raised rates in December, they expected to raise rates three or four more times this year.  I didn’t believe that then, as Chair Yellen is a dovish labor economist and has another year in that job.  Now, I think the stock market rally may have “sucker-punched” the Fed into believing the economy is better than it is.  It is only good but is not great!  The tepid signs of inflation are not enough to make that assumption.  One or two increases this year would be good.  Three or four would be bad.

Also, there is another important difference between fiscal and monetary policy.  Fiscal policy is the right arm of a right-handed boxer.  It is stronger than monetary policy.  During the Era of Trump, the United States is now a two-armed boxer.  As long as we don’t punch ourselves, we are either more powerful or just more dangerous.