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  • Why you should cheer a Federal Reserve rate hike




    Higher interest rates are coming, and no one can deny it.

    The November jobs report last week affirmed the strength of the recovery as once again the U.S. added more than 200,000 jobs to more than absorb new entries to the workforce and help push the nation’s unemployment rate even lower.

    Also last week, Federal Reserve Chairwoman Janet Yellen said she was “looking forward” to when the Fed “begins to normalize the stance of policy” and that “doing so will be a testament … to how far our economy has come.”

    The table is set for the first increase in U.S. interest rates in more than nine years, and should be heralded as a huge vote of confidence — something that, like Janet Yellen, all investors should look forward to.

    Yet detractors of the Fed often grossly misunderstand how the institution works. “It’s almost as if the Fed were designed to confound explanation of it,” Adam Davidson wrote recently in a New York Times Magazine with the pithy title “You’re Not Supposed to Understand the Federal Reserve.”

    There are a lot of scare tactics and downright lies out there regarding how the Federal Reserve operates. Here are a few facts to add some clarity:

    1. The Fed is not a political body: Central bankers are not politicians. The Federal Reserve Board of Governors consists of seven members who typically are trained as economists and were appointed by the president and confirmed by the Senate. These are bankers and academics called to serve this institution in much the way great lawyers and judges make their way to the Supreme Court.

    2. The Fed’s power is decentralized: Even if you want to claim those seven Fed governors are political, the FOMC meeting this month — that is, the Federal Open Market Committee — is actually made up of 12 people. These other five are rotating members chosen from 12 regional central banks. There is, in fact, no big bad bank at the middle, but rather the governors and a few representatives of various regional reserve banks. I suppose it’s possible for some corporate interest to corrupt this strange system, but it would be incredibly complicated given the decentralized nature of our ironically named central banking system.

    3. The Fed is scrutinized:: It’s fashionable to claim that we should “audit the Fed,” and that the institution is afraid of transparency. But the Fed is already audited several times a year — internally, by an external independent audit firm and by the Government Accountability Office among other institutions. It also publishes its balance sheet weekly (view it here) and now holds regular press conferences after former Chairman Ben Bernanke initiated the practice back in 2011 at the behest of those advocating for even more visibility into how the central bank works.


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