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What's Behind the Fed's Decision to Raise Interest Rates in a Stumbling Economy?

With a new recession threatening, Yellen HAS to raise rates

 

Much has been written and broadcast over the past few weeks in the financial media and the business pages of general-interest newspapers debating the wisdom of the decision in December by Fed Chair Janet Yellen and the Federal Reserve Board to raise interest rates for the first time in almost a decade.

On one side of this debate are people who say that the Fed needs to do this to prevent inflation from taking off. On the other side are people who warn that pushing up interest rates at a time when unemployment is still at a historically high level (and when real unemployment is more than double the official 5% rate) risks making things worse.

The increase of 0.25% in the Federal Reserve's benchmark federal funds rate -- the rate banks charge each other for holding short-term funds -- was pretty minimal, but the arguments for raising the rate at all are absurd on their face.

The New York Times quoted Yellen as saying interest rates needed to be pushed up lest the economy begin "overheating"! As she put it, had rates not been raised last month, ""We would likely end up having to tighten policy (meaning raising rates) relatively abruptly to prevent the economy from overheating," which she said could then throw the US back into recession.

What planet, or more specifically, what national economy does Yellen inhabit?

The US is so far from being an "overheating" economy it's not funny. Official unemployment has remained stalled at 5.1% for three months now, but that is really a bogus number created during the Clinton administration when the Labor Department obligingly eliminated longer-term unemployed people who had given up trying to find a job from the tally of the unemployed, so their numbers wouldn't embarrass the administration. The real unemployment rate -- called the U-6 rate by the Labor Dept.-- which includes discouraged workers who have temporarily stopped trying to find nonexistent jobs, as well as people who are involuntarily working at part-time jobs but who want to return to full-time employment, is actually still above 10%. And if people who have simply left the labor market because there is no work for them, are added in, as they really should be, the the real jobless raterises to 22.9%, or almost one in four working-age Americans.

Anyone who thinks an economy with that much slack in its labor force is in danger of imminent "overheating", as defined by rising pressures on wages and rising prices due to increased demand for goods and services, is nuts.

Raising interest rates in a economy that's still in a funk makes no sense...unless you think the economy's about to tank and youRaising interest rates in a economy that's still in a funk makes no sense...unless you think the economy's about to tank and you are stuck at a 0% with nowhere to drop rates as a stimulus
 

 



story | by Dr. Radut