The Fed Does California No Favor

It is hard for a Californian to be enthusiastic about the Federal Reserve Board’s decision to make the cost of borrowing money more expensive. This region’s economy, mired so long, is finally showing signs of life. But the Fed, worrying more about the future ravages of inflation than economic problems here, raised to 3.75% the benchmark federal funds rate. That action had been expected, but not so soon. And while it may cool the national economy, in California the rate hike could feel more like a blast of Arctic air.

The Fed calculates that a national recovery from the recent recession is well under way. Other economic indicators, it believes, are vigorous enough to overcome the dampening effect of making money more expensive by raising the floor on the cheapest money of all, the central banking system’s money. The Fed believes that by cooling down the recovery now, post-recession inflation can be avoided.

Monetary prudence is a good thing, and no doubt the Fed acted only after taking various factors into account. Indeed, if the American recovery is as real as so many economic indicators suggest, at some point action would have to be taken to prevent inflation rates from reaching alarming levels, as they did in the late 1970s.

But sound public policy depends not only on goals but on timing. And the Fed, having raised money rates two times already this year, may be stepping on the recovery--at least in this region--by tightening credit a third time. A Feb. 4 rate hike was the Fed’s first in five years, and it moved it up again on March 22--less than a month ago. Perhaps Fed officials know or see something no one else does, but the March inflation figure for the consumer price index was less than 1%.

It’s true that in other parts of the country the economy is really humming, but in California we are still trying to achieve liftoff. Fed officials quite rightly note that there is only one monetary system for all the United States, and argue that what is good for all of the country is good for each part of it. But in California defense cutbacks and the 1992 riots came on top of the recessionary slowdown, so this state will require a bit more tender loving care if it is to join the nation in full recovery.

It is very hard to see how this region--where banking, financing and real estate are such crucial elements of the local economy--will be helped by higher interest rates. It is also difficult to see how the United States will be able to enjoy a true economic recovery if California lags behind. This state is a large enough part of the total economic picture that it can become a dead weight, slowing everything else down. The Fed would have been better advised to wait before hiking rates yet again.