Money & Politics with Larry Kudlow

A Militantly Dovish Fed

Federal Reserve

Neither rain, nor sleet, nor snow, nor economic recovery, nor rising gold and commodities, nor $2.2 trillion in money-creation will stop the Federal Reserve from remaining ultra-easy.

This is what I call being militantly dovish.

That’s how I’m reading yesterday’s FOMC announcement.

Here’s my basic criticism of Bernanke & Co.: The emergency is over, folks. The recession ended last June. An emergency zero interest rate is no longer necessary.

Now, I know the Fed believes it can drain cash and raise rates when the exact right time comes to stop inflation. But as Milton Friedman taught us years ago, monetary lags are long and variable. Turning an ocean liner around takes time. In other words, it might require what amounts to an “inside straight” for the Fed to pull off this monetary miracle.

The Fed is still targeting unemployment — a lagging indicator — rather than gold and commodity prices, which are leading inflation indicators. As a result, the central bank did not indicate even a hint of restraint at its Tuesday meeting.

Bravo to Kansas City Fed head Tom Hoenig for his dissent — his second in a row. But unfortunately, the extended-period language he objects to is still there.

On another note, a U.S.-China trade-and-currency war may be brewing as the Treasury and certain members of Congress seek to designate China as a currency manipulator. They’re threatening trade protectionism if the Chinese do not revalue the renminbi.

Can you imagine anything worse right now than a trade war with China? Have people forgotten? Never poke a stick in your banker’s eye. Heck, China might even be the new Fed! They’re restraining money and credit with more of that to come.

We in the U.S. should stick to our own knitting. There’s plenty of work to do right here at home. Instead of higher tax rates, spendthrift spending, and a shaky dollar, we need lower, supply-side tax rates, governmental restraint, and King Dollar.

How about that? How about we quit blasting China and start working on our home-grown issues?

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