Monetary Policy: Darda Discovers that the LM Curve is Not Vertical

Whenever I read Michael Darda, I have to wonder what his point is:

Standing in stark contrast, however, are several important market and economic indicators that suggest the Fed remains accommodative: near record commodity prices, relatively low real short-term interest rates, rising monetary velocity, tight credit spreads, and robust growth in business loans.

Actually, real interest rates had risen from less than 1.7% last June to over 2.5% this June as measured by the 10-year TIPS rate. While Darda decides to stage some Marx v. Schumpeter debate, the resident Keynesian at the National Review would only have to turn to the old fashion IS-LM model to explain his parade of facts. Consider a mix of expansionary fiscal policy (outward shift of the IS curve) and tight monetary policy. Wouldn’t one expect the increase in interest rates to increase GDP relative to the money supply (aka velocity) to increase?

But then we get this:

I continue to expect the industrial economy (which expanded 6.6 percent at an annual rate during the second quarter) and non-residential investment spending to continue to advance at a robust pace.

I hope investment remains high, but this mix of expansionary fiscal policy with an offsetting monetary policy is not encouraging more investment – regardless of all the National Review spin to the contrary.