The Fed on Wednesday bumped interest rates again in an effort to contain inflation that is running at a 40-year high. The move will hinder job growth and highlights the dangers of rampant government spending during times of “easy money.”
A unanimous Fed committee made the move, which will boost the federal funds interest rate — the overnight rate on lending between banks — to a range between 3 percent and 3.25 percent. It’s the third straight rate hike this year, and it won’t be the last. The Wall Street Journal reports that a majority of Fed officials anticipate further increases of up to 1.25 percentage points in the next three months.
“We have both the tools we need and the resolve that it will take,” Fed Chairman Jerome Powell said, “to restore price stability on behalf of American families and businesses.”
But the cure could come at a significant cost. The increased price of borrowing is expected to juice unemployment, making it more likely that the nation will enter a recession — if it hasn’t already done so. The higher rates will also boost mortgage costs and make borrowing for purchases less attractive, potentially limiting consumer spending.
Of equal concern, the jump in interest rates will compound the nation’s debt problem. Politicians and presidents in both parties over the past 15 years have spent with reckless abandon, often using cheap money as an excuse for paying no attention to mushrooming red ink. As Reason magazine points out, the latest Fed move will add $2.1 trillion to the national debt over the next two years, as interest takes a bigger and bigger bite.
“That’s $2 trillion that goes on the tab to be repaid even though no one ever benefited from it,” Reason’s Eric Boehm pointed out this week. “It helped to build no bridges, feed no hungry people or make any business more profitable.”
The problem indeed predates the current White House and the pandemic, but President Joe Biden seems eager to make it worse by plowing full-speed ahead with his version of progressive Modern Monetary Theory, which posits that fantastical notion that governments face little risk from deficit spending if they can simply print more money to finance their endeavors.
The Biden administration’s insistence on dumping trillions into an economy recovering nicely from the pandemic helped trigger the inflation that now forces the Fed into taking aggressive action.
Yet it was only 14 months ago that Mr. Biden insisted, “There’s nobody suggesting there’s unchecked inflation on the way, no serious economist.” On Wednesday, Mr. Powell, a serious economist, observed that, “Inflation is running too hot” and the interest rate hikes necessary to deal with it will “bring some pain to households and businesses.”
No wonder that, as the midterms near, Democrats prefer to talk about abortion and Donald Trump.