Economics of Liberty

Fed Predictions Flounder: Hayek Once Again Vindicated

Recently President Obama has been touting the “great economic recovery” that has been supposedly ushered in under his presidency. An interest rake hike coming out of the Federal Reserve this month would be the icing on the cake for this politically delicious narrative. All the signs of one happening were there: steady increases each month in the new job numbers (even if many were low wage replacements to pre-recession jobs) and the unemployment rate siting steadily below 5%. Indications which seemed to be signs for Wall Street and the folks at the Federal Reserve that we were in the clear. Fed chairwomen Janet Yellen even gave a fierce speech that further emboldened traders, assuring them the economy was improving.

The Washington Post reports:

“The economy is continuing to improve,” Yellen said during a discussion at the Radcliffe Institute for Advanced Study at Harvard University. She emphasized that the Fed would move “gradually and cautiously” in raising its influential interest rate and that “probably in the coming months such a move would be appropriate.”

While Federal Reserve Bank of Richmond President Jeffrey Lacker shored up such a narrative by telling the press on Bloomberg Radio as recently as last week that,

“I certainly supported a rate increase at the April meeting,” Lacker said Thursday in an interview on Bloomberg Radio. “I think the case would be very strong for raising rates in June.”

This pumped up the likelihood of a rate increase to 34% as late as May 25, which may sound low, but it’s enough to have great effects on the pricing of treasury bonds.

But then reality hit…

Friday the Department of Labor released its May report that cited the lowest amount of job growth in six years. All of a sudden those bond prices plunged and the likelihood of a rate increase dropped to only 4%. Lisa Abramowicz, writing for Bloomberg, recently made a refreshing analysis that is all too seldom heard about central banking policy and the leaders who implement it.

It’s comforting for them (bond traders) to think the Federal Reserve has some secret trove of economic data or corner on wisdom that it uses to make Important Decisions, like the timing of interest rate increases. But it turns out the policy makers are just as in the dark as everyone else.

This analysis is eerily reminiscent of what famous Austrian economist, Friedrich Hayek told us long ago in his book The Fatal Conceit,

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

The truth is clear now more than ever that we really do know so little and that the consolidation of power in the hands of the few is not working. That is the point that all libertarians and constitutional conservatives agree upon. How do we go about fixing our economy, though? Well that is where Austrian, Chicago School Monetarists, and general theory economists may disagree. However, an audit of the Federal Reserve is something all of those groups can agree on and thankfully, as of May 18th, the bill H.R. 24, allowing for such an audit, passed committee in the House of Representatives. Now it’s waiting for a floor vote, where the fight for economic freedom will soon see its next battle.

We all hope it wins, but not just hope. Contact your congressman and sign the petition urging the Speaker to take it to the floor for a vote, because this is a battle we can’t lose!

Now, in the spirit of honoring FA Hayek, here is a video where he rap battles John Maynard Keynes.

Related posts