The Danger of a Fuzzy Calculus : Fed’s latest interest rate hike seems to be based on crude benchmarks

The Federal Reserve Board’s latest move--a breathtaking increase of three-quarters of a percentage point in two key federal interest rate marks--strikes us as a huge gamble. For this was the sixth and largest such increase of the year, and there still isn’t any evidence of significant inflation in the recovering American economy. Does that mean the Fed’s plan is working? Or that the Fed’s plan is overwrought?

From the perspective of Southern California, a relapse into recession is feared far more than inflation amid a roaring recovery. The worry here is that, to quote Jerry Jasinowski of the National Assn. of Manufacturers, “The Fed is fundamentally misreading the economy. . . . While the economy grew faster than expected in the third quarter, there is not much evidence of inflation.”

So why raise interest rates yet again, and by three-quarters of a point? For one thing, the Fed is looking at a national economic expansion and not just at California. Perhaps another important answer is that Fed officials actually may be less preoccupied with hedging the nation’s bets against future inflation than shoring up the besieged U.S. dollar, which these days is getting precious little respect on world currency markets. Rising interest rates here tend to lure foreign money into American accounts. And that tends to improve the dollar’s standing as a currency that is traded against other national currencies.

Whatever the motive, the question remains: Is the Fed making the right move? Our sense is that the Fed’s policy analyses are driven by tenuous calculations. They tend to be based on statistics about the economy that more resemble rough benchmarks than precise calibrations. They also depend on macroeconomic models that may or may not reflect the full reality of the complex American economy.

There are still a whole lot of people out of work, a whole lot of people trying to close escrow, a whole lot of companies trying to borrow money to get started or to expand.

The Fed may prove correct in concluding that higher interest rates are a good thing. But we are concerned about what they mean for California, and the decision overall is based on a lot of maybes.