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Federal Reserve

[10/20/16]  Say what you want about Donald J. Trump, but he is correct about one thing: the Federal Reserve has, with near certainty, been holding interest rates down for political purposes — namely, to aid Hillary Clinton in getting elected president of the United States.

In September’s first presidential debate, Mr. Trump said:

We have a Fed that’s doing political things. … The Fed is [being awfully] political by keeping the interest rates at this level. And believe me: The day Obama goes off, and he leaves [office], and goes out to the golf course for the rest of his life to play golf, [is the day that] they raise interest rates. … The Fed is being more political than Secretary Clinton.

The Federal Open Market Committee’s (FOMC) September meeting minutes, released on Wednesday, have proven Mr. Trump’s assertion to be true. As the 2016 election season draws to a close, the Fed has suddenly become more bullish on the prospect of raising interest rates — and this precipitous change-of-heart has come despite there being few notable signs of hope in the US’s economic data.

The meeting minutes detailed one FOMC member’s worry that low interest rates are unfairly hurting investors, particularly those with pension funds and endowments, and that these easy-money policies may be “depressing” economic growth:

One participant expressed the view that prolonged periods of low interest rates could encourage pension funds, endowments, and investors with fixed future payout obligations to save more, depressing economic growth and adding to downward pressure on the neutral real interest rate.

But the buck didn’t just stop here. Others repeated the (false) assertion that the Fed’s easy-money policies will inevitably tighten the labor market:

A few other members were concerned that, without a prompt resumption of gradual increases in the target range for the federal funds rate, labor market conditions could tighten well beyond normal levels over the next few years, potentially necessitating a subsequent sharp tightening of monetary policy that could shorten the economic expansion.

Remarkably, members even feared that continuing with these artificially low rates will generate too much debt and fuel unsustainable economic bubbles:

A few participants expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the nonfinancial corporate sector.

Don’t get me wrong: the fact that the Fed has finally demonstrated some hawkish instincts is relieving, but why did the FOMC fail to express concern about any of these consequences earlier in the year?

The FOMC meets regularly — this year, it has met in JanuaryMarchAprilJuneJuly, and September. If you have read through all of the meeting minutes like I have, you have noticed that while the committee has maintained that it will likely raise rates by the end of the year, there have been very few times in the previous five meetings that members have said anything negative about the Fed’s current low-interest rate policies.