The Inflationists Amongst Us: The Wall Street Journal Joins Donald Trump in Calling for Fed to Stop Hiking Interest Rates

Update below: President Trump reacts to the Journal editorial.

In a new editorial, The Wall Street Journal writes:

The right answer is to ignore the politics, inside and outside the Fed, and follow the signals that suggest a prudent pause in raising rates at this week’s Open Market Committee (FOMC) meeting....

The case for pausing in its interest-rate march back to “normal” starts with the Fed’s mandate to control prices with low unemployment. There’s simply no sign of an inflation breakout...

Some of our friends fret that if the Fed stops now, it will never get back to normal. But it will surely never do so if there’s a near-term recession. The best way to normalize is to keep the expansion going as long as possible without inflation.

This comes on the heels of a tweet by President Trump also calling on the Federal Reserve Board to not hike rates at its upcoming monetary policy meeting that will be held today and Wednesday:

It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!

— Donald J. Trump (@realDonaldTrump) December 17, 2018

Of course, the Fed shouldn't be manipulating the money supply at all and money supply manipulation is the key result behind the interest rate manipulations.

But what the Journal and Trump fail to understand is that Fed money supply manipulation, that is Fed increases in the money supply, distort the economy even when there aren't visible signs of price inflation.

The money distribution diverts funds from the consumer goods sector to the capital goods sector, This was all explained in detail, including the fallacies of other business cycle theories, by Murray Rothbard (See: The Austrian School Business Cycle Theory).

This distortion requires more and more money supply distortion increases over time--which will ultimately lead to severe prices inflation. This, however, doesn't mean that there isn't any significant price inflation at the present time.

Almost all price inflation indexes are at or near the Fed's "target" price inflation rate of 2 percent. A target that former Federal Reserve chairman Paul Volcker, who knew a thing or two about fighting price inflation and the money supply connection, has challenged in his new book.

He writes:

More recently, a remarkable consensus has developed among central bankers that there’s a new “red line” for policy: A 2 percent rate of increase in some carefully designed consumer price index is acceptable, even desirable, and at the same time provides a limit.

I puzzle about the rationale. A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.

Further, the detail man of former Fed chairman, Alan Greenspan, is now warning that price inflation is about to heat up.

When contrasted by the comments of Volcker and Greenspan, the Journal and Trump are serious inflationists. The current Fed, led by Jay Powell, which will likely raise the interest rate it controls, the Fed funds rate, by 25 basis points on Wednesday, should be considered conservative inflationists (both of prices and the money supply).

All this said, the Fed should get out of both the interest rate and money supply manipulation games altogether. They should allow interest rates to fluctuate in the free market and should return to a gold standard where the U.S. dollar is linked to a fixed amount of gold.

This won't happen Wednesday, the centrist inflationists, the current Fed membership majority, are in control and will prevail with most likely the hike. They are not as inflationist as Trump and the Journal but less conservative than the old-timers, Volcker and Greenspan.

But nowhere near are any of these close to being sound money gold standard advocates and so the Fed money manipulation business cycles will continue---and I am warning in the EPJ Daily Alert that a downturn in the business cycle is very likely right on the horizon, regardless of what the Fed does with interest rates on Wednesday because of past money manipulations.

The god of the business cycles never lets money supply manipulations go unpunished. It only fears the gold standard.

-RW

UPDATE

Trump responds to the Journal editorial:

I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!

— Donald J. Trump (@realDonaldTrump) December 18, 2018