A common sound bite today is that the Federal Reserve’s recent interest rate hike is pushing the nation toward recession. But that’s like beginning a book on page 813. The origin of today’s economic malaise is prolonged and massive federal budget deficits, combined with a Fed willing to finance those deficits. That’s precisely what we’ve seen for the last two years.
Many on the political left flat-out deny this reality, but many on the political right misunderstand what’s happening as well. The combination of fiscal and monetary policy is subtler and more complex than simple but shallow political talking points.
One such hackneyed phrase is that the Fed “sets” interest rates. Not exactly. The Fed sets the rate it charges for short-term loans to financial institutions, but it can only target other rates outside of its direct control. That means the Fed acts to influence rates, not set them, with the most watched interest rate being what banks charge each other for short-term loans.
