PUBLIC RADIO'S MARKETPLACE COMMENTARIES:

To the Fed: Don't Raise Rates

Robert B. Reich
Marketplace, September 6, 2006

The latest data from the Labor Department show average incomes rising faster than inflation. This has ruffled the feathers of inflation hawks, which now think the Fed will – or should – raise rates when it meets September 20.

The income data are irrelevant because they include stratospheric bonuses and stock options of top executives, which bring the "average" sky high. These top earners don’t ignite inflation because they don’t spend everything they earn. They can’t possibly. They earn too much. Most peoples’ wages are still stuck in the mud.

Granted, the Fed is in a tight spot. If it raises interest rates to keep inflation under control it risks pushing the economy into recession. If it doesn’t, it risks inflation. It’s a Hobsian’s choice, high-wire act, somewhere between a rock and a hard place. But if Ben Bernanke or any other member of the Fed’s Open Market Committee happens to be reading this, let me give you my strong advice: Don’t raise rates again.

The Labor Department’s other recent report is more telling. It shows only 128,000 new jobs in August. That caps five months of disappointing job numbers. It parallels other evidence of a slowing economy. Consumer confidence dropped in August.

If you’re still not convinced look at the two sectors of the economy responsible for a big chunk of jobs and economic activity – cars and houses. All post-war recessions before the last one started with higher interest rates leading to a drop in new car sales and housing construction.

Well, Detroit is now a huge parking lot of unsold cars. It doesn’t help that so many of them are gas guzzlers at a time when gas in most parts of the country still costs over $2.85 a gallon. Detroit’s cash give-backs and low-interest financing will only become harder if interest rates go up.

Meanwhile, existing home sales are now down 10 percent from a year ago June. Inventories of unsold homes continue to grow. Prices haven’t collapsed, but new homes construction is in the pits.

The last recession happened because the stock bubble burst. The Fed got us out of that slump by engineering a housing bubble. But it’s not clear what it does if the housing bubble pops.

If you’re still not convinced, look at the bond market. Unlike all the other cheerleaders on Wall Street, bond traders are paid to be realists. The yield on the benchmark 10 year T-bill has fallen nearly a half percent from what it was in late June. The bond market isn’t worried about inflation. It’s thinking economic downturn.

If foreigners get tired of buying T-bills with all their dollars earned from trade surpluses, then we’re in real trouble. As the dollar drops, everything we import costs more, which fuels inflation. But the economy, meanwhile, is in the tank.

We used to have a word for this. It was called stagflation.