Some of the folks watching the Republican presidential debates were struck by the fact that Donald Trump was apparently unfamiliar with the concept of the nuclear triad: that the United States maintains a nuclear force composed of land based missiles, submarine based missiles, and strategic bombers that can deliver nuclear weapons. This is the sort of basic knowledge of the U.S. military that someone hoping to be president should have.
In the same vein, there are aspects of economic policy that all the candidates should know. Unfortunately, when it comes to the Federal Reserve Board and its importance to the economy, most of the candidates seem to be failing as badly as Donald Trump did on his nuclear triad test.
The basic point is that the Fed has enormous power to control the pace of economic growth. It cannot always speed up growth as much as it might like, as we saw during the last recession, but it is quite capable of slowing the economy if it believes that it is growing too fast. It does this by raising interest rates.
Higher interest rates discourage people from buying houses or cars. It also discourages businesses from borrowing to finance new investment. State and local governments will also cutback borrowing for infrastructure and other long-term investments. And, households will not be able to reduce their debt burdens by refinancing their mortgages.
Higher interest rates will also raise the value of the dollar, making U.S. produced goods and services less competitive in the world economy. This will increase our trade deficit. Through these and other channels, when the Fed raises interest rates it slows the economy and the pace of job creation.