More evidence of Fed success can be seen in the rising value of the dollar. Relative to foreign currencies, gold, and broad commodity indexes, dollar value has appreciated by roughly 5 percent. On balance, over the course of this year, the Fed?s supply of bank reserves and currency in circulation has declined somewhat -- from nearly 6 percent annual growth to just more than 5 percent as measured by the adjusted monetary base.
Inflation readings have slowed markedly in recent months from a brief bump-up last winter. Presently, the core consumer price index is 1.7 percent higher than a year ago, with the chained index of the core CPI only 1.2 percent ahead of August 2003. With a historically low 5.4 percent unemployment rate, it is clear that low inflation, relatively high economic growth, and low unemployment can peacefully coexist.
It is also clear that supply-side tax cuts that lowered marginal rates on work effort and investment (investor dividends and capital gains) have helped spur economic growth. At the same, the tax cuts have held down inflation through the production of more goods and services to chase the existing money supply. In other words, more money is countered by even more growth.
Keynesian economists should take their Phillips-curve models -- that incorrectly trade-off growth and prices -- and bury them once and for all in the dustbin of history. While they?re at it, these apostles of government planning should also finally acknowledge that while short-term interest rates are heavily influenced by the Fed, long-term rates are completely at the mercy of market forces and their expectations of future inflation. Temporary budget deficits don?t drive up long rates, but inflationary money does.
So, as expected, the Fed raised its key interest rate by a quarter-point this week. That was the right move. But now is a great time for the Fed to take a pause. Inflation is virtually nil, economic growth is solid, unemployment is low, and the classic monetary paradox of rising short rates and falling long rates is a positive development. If it ain?t broke, don?t fix it. The maestro should take a rest.
He?s earned it. That?s right, the Fed?s gotten the story right this year. The scoreboard should read: Fed 10, Critics 0.