Kuttner has hit it right on the head. And your writer David Gordon of The Times Board of Economists. Interest rates are one of the most significant causes of inflation. The Fed continues its shop worn notions that it can cool off inflation by higher rates.
Never in history has inflation receded before high interest rates. They go in tandem for the very simple reason that they are components of one another always, but always, moving in the same direction. What the Fed failed to compute is the real condition of employment. Its statistics do not count those unemployed and dropping off unemployment compensation rolls at the end of eligibility: Their statistics do not count the amount it costs for a two-person working family to raise children in urban areas vs. the Midwest. What it costs to borrow money to put the kids through school, etc. Worse than anything, the Fed failed to take into consideration how many savings and loans would be saved and restored to health, at an enormous savings of taxpayer money, deficit money, if rates were lowered. We would never lose our foreign investors. They are not likely to shift significant sums away from us to France or Germany. We have their money--they are not going to abandon it. We’re the best and easiest moneymaking location they have.
Also, until the last few years, even in the days of very, very high interest rates, the real rates of interest have been in the 2.5% to 3% category, which is the difference between inflation rates and prime rates. Our inflation rate today is 4.5% to 5% and prime is 11.5%. Nowhere else in the world is an economy saddled with such constraints. The Fed has abandoned such difficult exercises as thinking and substituted computer programs and analysis.
The Fed will ruin the economy with its single-minded approach to the problem of inflation.
MERLE H. HORWITZ