The Federal Reserve—The Ultimate Self-Licking Ice Cream Cone

Our favorite once and former gold standard champion, Professor Judy Shelton, was on bubblevision this AM blasting Powell for raising interest rates. And because why?

Well, here’s what she said: These rate increases will cause unemployment to rise and output to fall, thereby shrinking aggregate supply and causing more inflation!

That’s circular nonsense, of course, as we amplify below. But at least the Keynesian covey in the Eccles Building is breathing a sigh of relief. If a couple of GOP Senators hadn’t stayed home with the blue state flu when her nomination to the Fed came up in December 2020, Shelton would be on the Fed today, giving them endless fits—albeit from a lot of random supply-side and purportedly gold bug directions.

Nevertheless, Shelton’s supply-side critique of Powell’s paint-by-the-numbers Keynesian approach to policy is quite illuminating. It actually tells you why the Fed is the institutional equivalent of a self-licking ice cream cone.

That is to say, its machinations inherently cause business cycle disturbances—in recent times mainly inflation of asset prices and goods and services. It then endeavors to remediate these distortions, causing even more business cycle turmoil. And that, in turn, mobilizes the politicians to help out by layering on counter-productive spending, tax and regulatory interventions.

The better part of wisdom, therefore, would be to repair to first causes. That much is more than evident in Shelton’s silly syllogism.

For crying out loud, all other things equal higher interest rates will indeed result in lower output. But so what?