Money & Politics with Larry Kudlow

The Fed Is Still Fighting the Wrong Demon

The Federal Reserve headquarters in Washington, DC.

So the Federal Reserve announced yesterday this discount hike to open up a penalty against the overnight fed funds rate.

But you know what? No one is really borrowing from the discount window anyway. So while this news is making headlines, it’s really not a huge policy change.

The real problem with the Fed continues to be loose money.

It has a $2 trillion balance sheet and, of course, a near-zero interest rate. So guess what? After the dollar fell 15 percent between February and December of last year, we are now receiving some bad readings on both producer and import prices.

No big surprise.

Over the past three months, PPI is up around 14 percent at an annual rate. Over the past six months, import prices are up 11.5 percent at an annual rate. Price hikes are showing up in the ISM reports. And even though the dollar has rebounded roughly 5 percent this year, its downward trend-line still remains intact.

In other words, it’s difficult for me to understand how the Fed can sit there and worry about deflation, not only with key price indexes rising, but also with very strong industrial production. Leading indicators are up ten straight months.

Why is the Fed still in emergency mode?

Because it is fighting the wrong demon.

And by the way, with all this big-government spending pouring out of Washington -- which will depress economic growth and make the money supply even more inflationary -- the cards are stacked against future price stability and King Dollar.

All of this worries me. I don’t know which is worse today, fiscal policy or monetary policy. Neither one looks good right now.

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