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The basic dilemma facing the Federal Reserve is this: Low interest rates promote economic growth but create the risk that the economy will “overheat” with too many dollars chasing too few actual goods and services — causing inflation. Today, the Fed announced it was raising rates for the first time since 2006, signaling that it is starting to worry more about inflation and less about jobs and growth.

The weird thing about this is that the Fed’s own forecasts show inflation getting lower, not higher.

Continue reading:  The Fed’s own data contradicts its case for raising interest rates

Further reading:  Fed raises interest rates, citing ongoing U.S. recovery

Commentary by The Secular Jurist:  A basic motivation must be considered with respect to inflation fears.  Those who have money, particularly those who have a lot of money, really hate inflation because it devalues their financial assets over time.  Using a simple example, a savings account earning 1% interest on a balance of $100,000 actually loses purchasing power for the account holder when the aggregate cost of goods and services (i.e. inflation) rises above that to say 2%.  Conversely, those without significant financial assets (i.e. the working poor) aren’t as directly impacted by inflation as long as their wages keep pace.  Therefore, this long-anticipated move by the Fed to raise interest rates, even though inflation fears have yet to be realized, suggests that it is responding – at least in part – to special interest pressures and not necessarily to sound economic principles.

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12 thoughts on “The Fed’s own data contradicts its case for raising interest rates

  1. “Conversely, those without significant financial assets (i.e. the working poor) aren’t as directly impacted by inflation as long as their wages keep pace.” We May as well note that wages, particularly lower wages, do not keep up with inflation. The costs of food, rent, and utilities rise continuously.

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    • Yes, wages have not kept up with inflation… since the 2000s. But before that, wages generally did keep up. The oil crises of the mid 1970s to early 1980s triggered recessionary high inflation (a growing economy halted by high energy prices) which impacted big money interests more than the (still) working poor. That’s when the national fear of inflation took root.

      This doesn’t mean that workers always fare better than big money during times of high inflation. Other factors are involved. However, the current period of wage stagnation (that’s hurting the middle class) has occurred concurrently with a period of low inflation. Furthermore, low inflation – or even deflation – typically signals weak economic growth.

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  2. According to prof. Richard Werner interest-rates do not really affect inflation at all. However, interest does redistribute wealth from the poor to the wealthy. That’s the real story and inflation is just a bogeyman to make the people swallow higher interest-rates.

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