For years, I have written a lot about the US Federal Reserve because the Fed has such influence over the economy, with the ability to control monetary policy. With three increases in the Fed Funds rate this year, and with a fourth likely in December, here are my latest thoughts on the Fed.
Federal Reserve Chairman Jerome Powell is in an unenviable position. Americans expect him to fine-tune interest rates to keep the economy strong and at the same time keep inflation under control. Yet the truth is, he can’t make things much better than they are right now, and he could make them worse.
For example, US GDP growth was 4.2% (annual rate) in the 2Q and nearly 3% for the year so far, the best showing in years. The unemployment rate at 3.7% is the lowest in almost 50 years. Inflation as measured by the CPI is running at 2.3%, just above the Fed’s 2% target, and is driven largely by oil prices – which could continue to fall just ahead.
This is what the Fed wanted, so there’s no reason for the Fed to obsess about it. I understand the Fed’s desire to get the Fed Funds rate higher so as to have more room to lower rates when the next recession comes. The question is, how much higher?
The concern is, let’s not raise the Fed Funds rate so high that it causes the next recession!
Three more quarter-point rate hikes will put the Fed Funds rate up to 3%, the highest level since 2007. I would think that gives the Fed ample room to cut rates when it needs to. Yet the Fed is looking to hike rates again in December and then at least three more times in 2019 and possibly even more in 2020. That could put the Fed Funds rate at 4%.
As long as inflation stays around 2%-2.5%, I think that’s unnecessary.
I think the Fed is more than justified in raising the Fed Funds rate again in December, as I believe it will. Beyond the December hike, however, I think the Fed should reassess on a month-by-month basis and make its decisions accordingly. Better to err on the side of fewer rate hikes unless inflation starts to accelerate.
Federal Budget Deficit Soars to $782 Billion in FY2018
You might have missed this with everything else going on in the world, but the Congressional Budget Office said earlier this month that the budget deficit for fiscal year 2018 rose to $782 billion, a 17% jump from the $666 billion shortfall recorded in 2017.
Federal revenues for the fiscal year, which ended on September 30, were up less than 1% on a year-over-year basis, the CBO reported, while spending was about 3% higher. The deficit rose to 3.9% of Gross Domestic Product, up from 3.5% in 2017.
The issue is this: When the economy is growing as strong as it is, budget deficits are supposed to go down. So why is it going up when economic growth is so strong? The media would have us believe that the increase in the deficit is all the result of President Trump’s tax cuts, but it’s much more complicated than that. I’ll briefly explain.
Here’s the issue. As noted above, federal tax revenues were up less than 1% in the last year, below expectations, in part due to President Trump’s tax cuts for individual tax filers and corporations. Nonetheless, revenues were up.
Yet in the financial media, we see articles just about every day from liberals who argue that the deficit is up significantly because of the Trump tax cuts. To be honest, this is partly true.
If the Trump tax cuts has not gone into effect, and the higher Obama tax rates had stayed in effect, the CBO estimates that the federal budget deficit would have been around $660 billion instead of the $782 billion that actually occurred.
But here’s the question: Would you rather have the strong economic growth of the Trump administration, with rising wages and more jobs, or the anemic growth of the Obama administration? The answer is probably the former.
The key takeaway her is this: Increased spending by Congress last year contributed more to the higher deficit than Trump’s tax cuts.
While the liberal media places the blame for the higher deficit 100% on the Trump tax cuts, the truth is higher spending was definitely the greater culprit. Keep this in mind as you read stories to the contrary.
The bottom line is, as always, Congress needs to spend less! But as long as we keep re-electing these same jokers, nothing will change. Sad but true…
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