Yes, yesterdays raise in the interest rate was small – 25 basis points or a quarter-point in regular person (instead of bankers/economists) language. Still, it’s been bugging the hell out of me. Unemployment is down at or near historic lows and has been for a while. For what seems like my entire adult life the Fed has reacted in horror to significant drops in unemployment and raised interest rates reflexively. Sort of a “My god! People have jobs and regular folks will have money to spend and even save! OMFG we rich folks won’t be the only ones free of financial worry! That’s a rather strange thing, because from its creation one of the core missions of the Fed has been to maximize employment – and we are about as close as can be expected.
So what started with a few governing principles wasn’t so simple in practice. Things never are. The Fed is also supposed to smooth out economic swings. Keep the highs from getting too high or the lows from getting too low. One could say a big part of the job is keeping us in or very near a “Goldilocks” Zone. A major tool in their box is interest rates – as in setting the prime rate at which banks and other borrowers can obtain money. It’s a rather blunt tool but it gets the job done, but being blunt it doesn’t do the job “neatly.”
I should also note that over time the various functions the Federal Reserve have expanded. The job of the Board of Governors is a complicated one to be sure and there are a lot of things they have to factor into their decision making. They have to set priorities, and maximizing employment might have been part of their mandate from day one, for a long time now the organizing principle has been keep inflation low. That’s not necessarily a bad thing. For sure, the jump in prices as a result of COVID have hurt most of us. But it’s also worth noting something I truly believe the Fed refused to take into consideration – actual prices of goods increased only by half of what the rate of higher inflation was as things got (and stayed) bad. The other half was corporate America and even smaller businesses taking advantage of the situation!
In any case keeping inflation low, say around two percent (or less) has been the Fed’s goal for an awful lot of decades. So here’s what bugs me: Inflation HAS gone down and noticeably so. I saw a figure of three percent recently. Even if it’s closer to four, it’s still way down from what it was.
But for way over a year we’ve heard talk from the Fed about a looming recession. And also constant talk about inflation. So a steady series of rate hikes began with each meeting of the Board of Governors. At the meeting prior to yesterday’s there was no increase. As I recall the talking heads were slightly startled but felt like the Fed wanted to do a spot-check of sorts to see where things stood. Had they gotten us back to or near that Goldilocks Zone and if the latter were we heading into it.
Well, unemployment remained really low and inflation dropped even more!
So WHY raise interest rates?
It’s true that wage earners are gaining, winding up with income increasing faster than the rate of inflation. But that’s been the case for a while now as a look back at unemployment and wage data has shown. Job growth has been great and should continue as the Investment Recovery Act kicks in. Problems in the supply chain have been identified and some changes for the better have been made with more to come. And as things have returned to the new normal post COVID workers are able to be more choosy about who they work for. Including their wages and benefits. Also, more have started their own businesses. This isn’t all out of the blue. It’s been increasingly evident as this year has progressed. Despite all this, as I noted after a meeting where they left interest rates alone inflation dropped some more!
Yet the Fed seems to be back on a rate increase strategy again. WFT?
I see two possibilities. For all their (for well over a year, closer to two) predictions of doom and gloom and us being in a recession by now the economy is improving and a recession seems not all that likely. Maybe they feel stupid, or think people view them that way and they’re all defensive about not turning out to be the geniuses they want us all to believe they are. So, if things are going well enough a recession is unlikely then by god they will jack up interest rates to the point where they DO get high enough to force us into one!
Yes, I know I venture into tinfoil hat territory with that one. Still…
Another possibility is that these ARE after all bankers. Not all are Republicans, but even the Democrats think like bankers and as big bankers. Rich people. Like really, really rich people. Let’s start with something I heard a pundit say yesterday in response to a question of why consumer confidence is low. She noted all this constant talk about recession is coming for over a year. People hear/read it everywhere from every news outlet. If not daily then multiple times a week. The suggestion she said in so many words is that the media might be creating a self-fulfilling prophecy, but at the very least has been whether meaning to or not tanking President Biden’s approval rating on the economy.
So let’s get back to the bankers by which I mean the ones at the Federal Reserve. These are people who have continued what those before them started, which is to help transfer wealth from the masses to the few. In less than fifty years their policies played a key role in transferring staggering amounts of wealth from the strongest middle class the world has ever known (as well as from the working/lower middle class and of course poor people) into the hands of a very few. Even before Trump more wealth was in the hands of fewer people than in the 1920s, which not at all coincidentally led to the worldwide Great Depression!
I’ll also say this, while it’s not true of all of them for the bulk of very rich people the idea of money in someone else’s bank account, especially money in the hands of working and poor Americans is HATEFUL. It drives them f**king insane!
One thing about financial bad times including recessions that’s always been true is that those with a LOT make out like bandits. There’s a reason bankers and other financial conservatives fought tooth and nail against the New Deal reforms enacted by FDR. And that they’ve fought tooth and nail ever since to undo them. (Sadly with a fair amount of success) The regular, wild financial instabilities that preceded those New Deal reforms were of great benefit to a very few rich Americans. There are those who want things back to the pre-New Deal days. Both in the financial system and in other ways – a return to the Lochnar era of labor law and regulation.
Just as The Federalist Society was a group of people who created and implemented a plan they knew would take decades to remake the federal courts, I believe that even though there’s no formal group (at least that we know of) there’s a group of hard core rich people who want to turn back the clock a hundred years. Or more. A would be new “Robber Barron” class.
Am I crazy to suggest that a second Biden term, which would quite possibly include Democratic majorities in both the House and Senate would be a major setback for these people? And that a recession next year is exactly what they not only want but need to give Trump or some other GOPer the White House?
Don’t tell me the Board of Governors of the fed are immune from outside pressures. The Great Recession that began in 2008 (thanks to the kind of people I’ve just written about) wound up causing the Fed to drop the prime rate to historic lows. Zero even for a while. But Obama somehow not only got us through that awful time but had us on a good path when he left office. Trump was handed a good economy with solid underpinnings that was on autopilot to getting better still, and finally including working class and poor Americans in the benefits.
However, financial wheelers and dealers which included Trump wanted to keep certain things, like the Fed’s rate for borrowing low, low LOW. And he browbeat them into doing so which meant when he pushed through his own “supply side” tax cut rich people and especially corporate American could borrow all they wanted a zero or little interest to buy up stock. I wonder how many of the bankers in the Federal Reserve system (or their relatives) made a tidy sum for themselves out of that? Since corporate America includes major news outlets it’s not like they’d want their investigative journalists that understand finance digging into stuff like that!
The Fed should have increased interest rates back then but didn’t. It wouldn’t have stung much, and would have given a little room in case it was needed to drop rates to respond to a problem, or worse a crisis. But my point is they DID respond to political pressure led by Trump to not do that.
Now? Well, I already laid out two reasons why despite no indicators they needed to do so they increased interest rates again. And seem poised to continue doing so. No, I don’t think they want a “deep” recession, just enough of one to take the shine off the success President Biden has done so much to create. Just enough to give GOPers a good shot at using RECESSION! BIDEN’S/DEMOCRATS FAULT!!!!! as a campaign tool to keep us from finally dispensing with Reagan’s “Supply Side” economics and maybe even Milton Friedman’s “Board’s have no public good duty – only a duty to maximize shareholder’s return on investment” way of running our economy.
Think about it.