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Time to Raise Interest Rates

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The Fed has decided to maintain their excessively low interest policy yet again in their Open Market Committee meeting today.  Anyone who understands Austrian economics will know that the Fed's manipulation of interests at all causes a misallocation of resources and destabilizes the economy.  The Fed's interest rate policy is a price control, pure and simple, which removes vital information from economic decision-makers.

As long as the Fed manipulates interest rates, no information is available to determine what the market interest rate would be, but we can be certain that it is above the near-zero rate the Fed has maintained for years.  This distorts price signals to investors and throughout the economy more generally, and is one reason the economic recovery has been so slow.  Given that the Fed is manipulating interest rates, it is an easy call to conclude that it should raise rates now to help put the economy on track.

Presumably, the prices of financial assets rise when interest rates fall, but let's look at the stock market's reaction to the Fed's announcement.  After being in the green most of the day, and getting a big bump right after the Fed's announcement, both the S&P 500 and DJIA closed down for the day.  If the Fed is looking to the stock market for guidance, it appears that a move toward higher interest rates is overdue.  While it is true that there is an inverse relationship between interest rates and asset prices, asset prices are also affected by the longer-term economic outlook, and the Fed's policy is signaling monetary manipulation that is making the long-term outlook appear more bleak.

Randall G. Holcombe is an Associated Scholar of the Mises Institute, DeVoe Moore Professor of Economics at Florida State University, past President of the Public Choice Society, and past President of the Society for the Development of Austrian Economics. He received his Ph.D. in economics from Virginia Tech, and has taught at Texas A&M University and Auburn University. Dr. Holcombe is also Senior Fellow at the James Madison Institute and was a member of the Florida Governor’s Council of Economic Advisors. His books include From Liberty to Democracy: The Transformation of American Government (2002), Producing Prosperity (2013), and Political Capitalism: How Economic and Political Power Is Made and Maintained (2018). His primary areas of research are public finance and the economic analysis of public policy issues.

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