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Interest Rate Hike – Archaic Financial Thinking? (Part 1 of 2)

US_Federal_Reserve_Eccles_Building_1937

Touch the Soil News #259

This is an opinion piece by Benjamin Gisin. While Congress debates whether the nation’s poorest workers should receive an increase in wages, the Federal Reserve moved to give investor’s an increase in income without representation by those who must foot the bill for that increase.

We’ve been taught inflation must be curbed by raising interest rates. How can adding more cost to the economy (increasing the cost of debt) fight inflation? An increase in interest rates disproportionately affects the “debtors” of America most of whom are not contributing to inflation, but are being punished for inflation. Most people and businesses owe more money than they have in savings.

One of the major effects of interest rate increases is to the major corporate employers of America. Most large corporations are huge users of credit – they operate with a lot of borrowed money. When the cost of doing business goes up for the largest employers, the domino effect is predictable – they find ways to cut labor costs to offset the increased cost of debt.

The Federal Reserve Bank Board building in Washington, D.C. Built in 1937, the building houses the board of governors of the Federal Reserve Bank. Here, many decisions are made that may help or injure Americans without any representation by the Americans impacted.

US_Federal_Reserve_Eccles_Building_1937

Another segment of the economy that is a large user of credit is agriculture. With 50 million food-insecure Americans, what sense does it make to raise the cost of food by artificially increasing the cost of its production?

By increasing the cost of things through interest rate increases, it causes the prices of basic necessities to go up making it less affordable to the poorest of people. As people buy less, businesses suffer and the economy slows down – Is this the right plan?

A few years back, I had a chance to converse with one of the Federal Reserve’s top economists. I told him the Federal Reserve Bank was losing credibility with the average American. When he asked why, I said it was simple – by raising interest rates, the Fed punishes many who are not guilty of causing inflation and requires them to pay more to financiers (often guilty of causing inflation). In plain English, the practice of punishing the innocent is not good politics or policy.

To justify the recent increase in interest rates on December 16, 2015, the Federal Reserve released a press release with the following statements: “It (the Fed) recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans. The economic recovery has clearly come a long way.”

How many business owners and employees would agree with this statement? In its press release, the Fed argues that over the last three months job gains have averaged an estimated 218,000 per month. The Fed fails to acknowledge that the U.S. population increases an average of 200,000 per month and has done so for decades. In short, 200,000 of the 218,000 new jobs have to go just to increases in the number of folks entering the job market. A net increase of 18,000 jobs over the last three months, as hiring goes up for the holidays, doesn’t mean much in a nation of 322 million people.

While it is an opinion on my part, raising interest rates at the expense of working people, businesses and the food-chain should be relegated to the past. For the future, those contributing to inflation should be identified and dealt with through some other regulatory mechanism. How long can the Federal Reserve maintain a policy of one-size-fits-all that ends up punishing the innocent?

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