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Showing posts from June, 2019

Editorial: Federal Reserve Not a Rational Actor

The Federal Reserve System raised the federal funds rate, which determines U.S. interest rates,  from .5-.75% all the way to 2.25-2.50% following the inauguration of President Donald Trump. As we noted in our flagship editorial on monetary policy , these hikes sprouted from the Fed's over-reliance on Phillips curve, which led them to  intentionally  dampen economic growth. They did their job so well that it was to a fault: Between the September 27, 2018 rate hike and the aftermath of the December 20, 2018 increase, the Dow Jones industrial average shed a total of 4,648 points. Meanwhile, the yield on the 10-year U.S. Treasury bond plunged from 3.06% (September 27th) to 2.74% (December 24th) while the 1-month yield surged from 2.1% to 2.42%. The indication is that as the Fed continuously hiked their rates, investors became more and more frightened: The Treasury had to pay more to service short-term debt because creditors, unsure about short-term economic conditions, flocked to