Fed Hikes US Interest Rates

The end of the 2-day FOMC meeting came with an announcement that the fed funds interest rate was headed up a quarter of a percent. The hike is minimal, and it is not designed to do anything more than convince the markets that the Fed hasn't forgotten to fight inflation. And the markets forced the Fed to act.

In the interests of intellectual fairness, this journal believes that the Fed has erred and that the US and the rest of the global economy would be better of if the American economy allowed a little inflation to creep in. With a half-trillion dollar federal budget deficit and the Fed Fund rate at a mere 1.25%, a significant attack on the American homeland would cause a reversal in the economic recovery at a time where the authorities have almost no weapons in their expansionary arsenal. While the ability of Al-Qaeda to strike again in the US is doubtful, risking an extra point or two of inflation to make sure the economy is hot enough to absorb an attack is wise.

That said, the indicators are all up. Employment is returning to almost tolerable levels, the economy is growing, and oil is dropping a bit. The market decided that it was time to worry about inflation, and most pundits began talking about a quarter percent increase. A great many traders presumed a hike of that magnitude. Moreover, even the popular press ran the obligatory stories on what the rate hike means to the average person.

With such expectations and such indicators, the Fed would have lost some of its reputation had it not increased the Fed Funds rate. There would have been some panic in the markets as the Fed signaled that it was unconcerned about inflation in an environment that most had decided required action. The recently extended tenure of Chairman Greenspan might have been called into question.

Still, a 0.25% increase amounts to just $25 more on a $10,000 loan, a bit over $2 per month. It's hardly significant for most people. The risk is that the Fed's signal is going to choke off the recovery hits its stride as the central bank tries to fight inflation that is barely visible.

© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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