The Fed Tightens

Macroeconomic performance is the most important determinant of political outcomes. And prognosticators tend to look toward a mixture of partisan elected officials and foul winds of fate and chance as the main determinants of macroeconomic performance. The truth, however, is that the Fed is the most important determinant of macroeconomic performance. And the Fed has decided it wants to slow down growth:

The Federal Reserve’s decision to raise the interest rate it charges on short-term loans to banks reverberated in the financial markets Friday, sending overseas stock indexes lower and giving fresh momentum to a recent rise in the dollar.

The Fed took the move to normalize lending after holding interest rates to extraordinary lows for more than a year to prop up the financial system. But the decision, announced after the close of equities markets in New York, sent Asian shares lower, with the Nikkei 225 index in Tokyo dropping nearly 2 percent, and both the Kospi index in Seoul and the Hong Kong’s Hang Seng indexes showing similar declines.

I have no idea why they thought this was a good idea. There’s a ton of excess capacity still in the United States. The whole world economic is incredibly fragile. Million of Americans are sitting around unable to find jobs. Hundreds of thousands of businesses are saying they’re not looking to expand operations because there are no customers. Mall space and office space is vacant. New household formation has slowed down and vacant homes litter the landscape. But the Fed moved to tighter money and the markets are reacting.

Meanwhile, there are two vacancies on the Federal Reserve Board of Governors. We have independent monetary policy in the US, but ultimately authority derives from elected officials. The Fed plays a substantial role in determining the face of the economy and the fate of the Obama administration. In turn, Obama is supposed to play a role determining the composition of the Fed board. But for some unknown reason he’s not doing it.