You should be Concerned about Why the Fed Wants to Raise Interest Rates

Financial news: The Fed will likely raise interest rates soon.

The Fed has kept interest rates low for several years now, as a way to stimulate the economy. An eventual increase in rates has always been expected. But everybody should be concerned about WHY the Fed would choose to raise interest rates at this point in time.

Interest rates are intermediate targets of monetary policy. Controlling future inflation is the overall goal. Never mind that we are still fighting economic problems caused by inflation being too low rather than too high. Do you know HOW the economic logic of using higher interest rates to achieve lower inflation works?

Get this...

It works by cutting jobs and wages. This is not a byproduct of higher interest rates; this is the specific rationale for higher interest rates. It is another intermediate goal.

The logic isn’t simply:

Higher interest rates create lower inflation.

Rather, it goes like this:

Higher interest rates create lower wages and fewer jobs which prevent wages from being part of a wage/price spiral which creates lower inflation.

In other words, wages go down first, which theoretically will put downward pressure on prices.

Because you need to prevent wages from creating a price/wage spiral in order to fight inflation. That is the rationale being used.

Now, there is a way to use this kind of policy to fight inflation, if it were a real problem (and it isn't), and still not affect jobs and wages in such a direct, negative way.

But, get this...

In order to do that, Congress would have to coordinate the Fed's tight money policy with an offsetting stimulus plan that would in effect put upward pressure on jobs and wages. I don't have the exact quote, but in essence the rationale of the Fed is: "Our policy would have a negative effect on jobs and wages, we know that. And we know that the economy doesn't need fewer jobs and lower wages. But Congress can fix that with fiscal policy". And it’s true. A major investment in our crumbling infrastructure would work wonders in the economy – in terms of jobs, wages, and demand as well as the future benefits that an improved infrastructure would provide to domestic businesses.

Who doesn't see the fallacy of expecting THIS congress to do such a thing?

Many of the problems in the economy are caused by 35 years of stagnant wages while productivity has continued to rise. Corporate profits have risen with productivity, but workers have not shared in productivity gains. As a result, consumer demand is below its potential. Fewer Americans have a shot at “The American Dream”. For more on why this is a problem in the overall economy, see “A Market-Based Economy is a Pass-Through Economy”.

Economic policies from Congress have created this situation, and only Congress can fix it. But THIS Congress certainly won’t fix it, and especially not during an election cycle in which the necessary policy changes would directly contradict all of the political rhetoric of the majority party.

Low wages and access to well-paying jobs are real problems in the economy. They mean that we do not have a shared economy. Only a few people benefit from this situation. Those few who benefit WANT you to believe that inflation is the problem, because policies that are designed to fight inflation are also policies which put more of the nation’s income at the top of the economic ladder. Unfortunately, those who benefit from low wages and fewer jobs are also the ones who control our media and finance our politicians. What we hear is mostly what they want us to hear – and what we hear are arguments that support their best interests, not ours.

High inflation is NOT a problem in today’s economy. If you believe the rhetoric that says otherwise, please read “Inflation: Not What You Think it is” and "What Everybody Should Know about Inflation”.
Jerry Wyant