A Fed Rate Increase In The Making

Ninety-nine out of one hundred economists say that the Fed will not raise rates this time around. The agency will express its concern about inflation and leave it there. The agnosticism about about the roles of inflation and recession serve the economy poorly. By not playing favorites, the Fed pushes out the day when it cannot do anything because events have moved well ahead of it.

Bernanke and his fellows can look at recent employment figures and increasing prices and hope that one or the other will begin to dissolve back in the direction of what is normal.

One blight is worse than the other, and in the current case, it is almost certainly inflation. The GDP growth rate may be nominal, but at least the pulse is there. A recession may have already arrived. It may get deep, but as of today the evidence is that it is not deep yet.

A .8% inflation rate last month is inflation at the door. Even if the prices of key commodities like oil drop, they are still well above where they were a year ago.

The Fed’s last several interest rate cuts may have helped bank balance sheets, but the firms did not lend that money to anyone else. Consumers cannot get loans. Neither can most businesses. The LBO market has gone away. The economic benefit has been zilch.

Raising rates may not do much either. But, it would be a safety net. The consumer does not have much money to spend, so inflation may not be able to take off anyway. But, the prices the consumer cannot control, like oil and agricultural products, will be pushed on him anyway. The consumer is already in a bottle. Raising rates just puts in a cork.

Conventional wisdom is that a global slowdown will take the edge off price increases, but it is not clear that OPEC will not cut production a bit to keep its income high, or that a falling amount of acreage devoting to farming will not offset any possible dip in demand for food. With the global population growing, the scales are still tipped in favor of higher prices.

Stagflation is worse than recession. The Fed may be able to do something about keeping this recession simple by keeping rising costs out of the picture.

Douglas A. McIntyre