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Yellen has to raise rates: What's Behind the Fed's Decision to Raise Interest Rates in a Struggling Economy?

By       Message Dave Lindorff       (Page 1 of 2 pages)     Permalink

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By Dave Lindorff


When rates go up, the economy slows and vice versa
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Much has been written over the past few weeks in the financial press and the business pages of general interest newspapers debating the wisdom of the decision in December by 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 -- is pretty minimal, but the arguments for raising the rate are absurd on their face.

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The New York Times quoted Fed Chairwoman 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 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 a bogus number created during the Clinton administration when the Labor Department, to avoid embarrassing the administration, obligingly eliminated longer-term unemployed people who had given up trying to find a job from the tally of the unemployed. 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%. If people who have simply left the labor market because there is no work for them, the real rate rises to 22.9%.

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 employee wages and by rising prices from increased demand for goods and services, is nuts.

Another argument for raising rates was a supposed need to "reassure" investors (this at a time that equities markets are trading at something around a frothy 18X future earnings, which hardly suggests investors who are in need of encouragement!).

Here all one can do is stare dumbfounded at whoever makes such idiotic statements, Yellen included. Investors do not want to see interest rates go up! They never do. In fact, anytime interest rates get raised, you can watch stock markets drop. That's how it works, and in fact we're seeing it happen now, with markets down almost 10% in the new year -- making 2016 the worst start of a new year in stock-market history..

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So what's really going on here?

My own theory is that the Federal Reserve Board recognizes that its gimmick of pumping up equities markets artificially through former Fed Chairman Ben Bernanke's "quantitative easing" ploy of providing free speculative cash to Wall Street Banks - a popular give-away to the rich that has done nothing for the average American -- is running out of gas. The US economy, which has never really recovered from the 2007 crash and subsequent Great Recession, is starting to wheeze and gasp for air. A new recession is looking increasingly likely as early as this year even though there never really was a recovery from the last one. (How could there have been in an economy that depends for 70% of economic activity on consumer spending, but where those "consumers" are still experiencing reduced income in real dollars from what they were earning in the 1990s, their savings and home values are still shriveled, and many are actually unemployed.)

So put yourself in the Fed's shoes. A new recession, quite possibly even worse than the disastrous one we just went though, is in the offing, and the only tool the Federal Reserve has in a country where both parties have ditched Keynesianism and just want to cut (non-military) government spending, when it comes to trying to stimulate the economy, is cutting interest rates.

And you cannot cut interest rates that are already at 0%.

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Dave Lindorff is a founding member of the collectively-owned, journalist-run online newspaper www.thiscantbehappening.net. He is a columnist for Counterpunch, is author of several recent books ("This Can't Be Happening! Resisting the (more...)
 

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