Source: Zero Hedge.
The Open Market Committee of the Federal Reserve System has raised a key interest rate from a quarter of a percentage point to half a percentage point.
The interest rate is the Fed Funds target rate, the interest rate at which banks lend money to each other overnight in order to have the minimum reserve funds required by the Federal Reserve System.
One of the goals of the Federal Reserve System is to strike a balance between unemployment and inflation by regulating interest rates and the supply of money.
The idea is that when interest rates are low, people borrow more money to spend and investment, resulting in more jobs but also inflation and price increases. When interest rates are high, the reverse supposedly happens.
But key interest rates have been at nearly zero (or below zero according to some measures), and the economy hasn’t responded. The increase in jobs is much less than in previous economic recoveries, while inflation continues low.
I was one of those in years past who criticized the Federal Reserve Board members for being too quick to choke off economic recovery. They saw rising wages and lower unemployment as a threat of inflation, which for a banker is the worst thing there is.
But that’s yesterday’s news. I don’t see how interest rates changes in the range the Fed is talking about can choke off anything.
I think the United States needs fundamental economic reform, including the breakup of monopolies, the reform of corporate governance, an overhaul of the banking system, a rejection of pro-corporate “free trade” agreements, prosecution of corporate criminals, stronger labor unions and cooperatives, and investment in education, research and infrastructure, to start with.
Attempts by bankers to move certain key economic indicators aren’t enough.
Reliance on monetary stimulus is highly attractive because it promises prosperity for all without threatening any vested interests. But the stimulus only works if the economy is healthy to begin with.
Fed Hikes Rates, Unleashing First Tightening Cycle in 11 Years by Tyler Durden for Zero Hedge.
Fed Increase Is the Most Important Thing Ever. Oh, Wait by Barry Ritholtz for Bloomberg View.
The “American Dream” Is Over – And Voters Know It by Charles Hugh Smith for The Daily Reckoning.