FED Rate Increase Disappoints Me and Kudlow for Different Reasons

James Hamilton provided an interesting discussion of monetary policy in advance of today’s FED decision with some good links that did not include Mark Thoma:

Thus, according to the CBOT 30-Day Federal Funds futures contract, there is a 100% chance the target rate will increase .25% to 3.50%, and a 9% chance it will increase an additional .25% to 3.75%.

It seems the FED raised this rate to only 3.5%, but that likely disappoints Lawrence Kudlow who probably was hoping for no increase:

If you prefer a commodity-price-rule approach to monetary policy, the following will beg your attention. The Commodity Research Bureau’s spot commodity index (which excludes oil and gold) has been flat for about 19 months, stretching all the way back to early 2004. This commodity flattening follows the sharp commodity recovery of 2002-03, which itself followed a protracted period of commodity deflation that reached back to the 1997-2001 period. So it’s been a bumpy ride for Federal Reserve policy. But the key point, insofar as Fed strategy should be concerned, is simply that the central bank has succeeded in removing most, if not all, of the excess liquidity they created following 9/11 and the vicious deflation that preceded the terrorist attacks. In my view, the Fed should declare victory and stop their auto-pilot restraining actions before they completely flatten or invert the yield curve.
While I may agree with the policy recommendation, I’m not a fan of the commodity-price-rule approach. But to be fair, Kudlow is at least finally articulating his preferred monetary rule. But doesn’t it seem odd that one would wish to have the FED run easier monetary policy during go-go periods such as the late 1990’s and tighter monetary policies during weak labor markets such as what the U.S. experienced from late 2001 through 2003?

I was hoping the FED would not raise interest rates as I see the labor market is still being rather weak. Kudlow, however, thinks the labor market is quite strong. I know why I’m disappointed in today’s news that the Federal Fund rate was increased – but as Mark notes, it could have been worse. I bet Kudlow is also disappointed – but the reason for his disappointment is likely to be different than mine.

Update: Mark Thoma has more on the news from the FED as does Bill Polley. Also see Bill’s post that proceeded the news.