Dear Jack,

On Wednesday the Fed raised interest rates by 0.75 percent. That might not seem much, but the cost of borrowing almost doubled overnight.
 
Interest rates are still historically low, but the era of easy money economics could be coming to an end.
 
For the past two decades, central bankers around the world have used low interest rates as a solution to almost every economic problem. When the giant hedge fund, Long-Term Capital Management, collapsed in 1998, the Fed cut interest rates to prop up the stock market.  After the subprime bubble burst in 2008, the Fed did the same again.
 
Threatened by a global covid pandemic? Cut rates. Risk of recession? Lower rates. Confronted by a market correction? Lower rates some more.
 
Central bankers acted like they had found a magic formula that would produce perpetual prosperity. But, of course, keeping interest rates so low for so long has consequences: 

1. Easy money is inflationary. When the Fed intervened to prop up the stock market, they pushed up the price of almost every asset in America. Until very recently, consumer prices might have remained stable (in part because the US was able to import cheap consumer goods from China.) But with all the additional easy money that the Fed has hosed at the US economy in the past two years, even the prices of everyday items are rising, too.
2. Bad investments. When interest rates are set too low, capital gets misallocated. When borrowing is ridiculously cheap, lots of money gets poured into businesses and ideas that don’t actually make much sense. We could be about to see which those might be. With debt so cheap, a lot of businesses have borrowed heavily. As long as interest rates remain low, they can service those debts, but not actually pay off the principal. Rising rates will flush out a lot of these ‘zombie’ companies.
3. ‘Woke’ investing. A number of the largest fund managers in America have started to make investment decisions on the basis of ESG criteria – or Environmental, Social and Governance. This means that instead of deciding how to invest the capital they manage on the basis of what returns it might yield, fund managers have allocated capital on the basis of their own political preferences. ESG criteria are almost entirely subjective. 

A direct consequence of ‘woke’ investing is that oil and gas projects have been deliberately and systematically starved of capital. This, in turn, helps explain why gas prices are so high. With ‘woke’ fund managers driving investment out of the oil and gas sector, there is a constraint on supply – which is one of the main reasons you are paying higher prices at the pump.
 
ESG might not survive the return of economic reality. Who wants to hear what your fund manager thinks about making the world a better place when the assets they manage are down 20 percent? 
 
Now that rates are rising, expect a lot of discussion about why interest rates were not increased earlier and what the right rate should be. 
 
US Treasury Secretary, Janet Yellen, recently admitted that she made the wrong call on interest rates back in 2021 because she was ‘wrong about the path that inflation would take’. No doubt there will also be debates about who the President ought to appoint to the Fed to ensure that they make the right call in the future.
 
The next generation of conservative leaders in America might need to think further than who they want on the Fed. Those that believe in free markets should instead be asking why a government agency, the Fed, fixes the price of credit in the first place. No government agency, no matter how smart and well-informed, will ever know enough to be able to set the perfect price. 
 
Conservatives should ask not if we have the right interest rate, but - fifty years after Richard Nixon inadvertently created it – do we have the right sort of monetary system in the first place?