THE Federal Reserve will be making an enormous mistake if it raises interest rates today.
Nearly everyone is expecting Chairman Alan Greenspan and his rubber-stamp colleagues to push the so-called fed funds rate up another quarter point when the Central Bank’s Open Market Committee meets today.
This would be the second rate hike since late June as the Fed pursues its wrongheaded attempt to rein in an economy that – as last week’s employment numbers clearly showed – is growing much too slowly already.
To be fair to the Fed, there are some valid reasons that could justify a rate hike.
Inflation is now running at more than 3 percent a year and Greenspan might want to raise rates now so he will be able to cut them later if he needs to do that.
Lower economic growth means less demand for money, which means rates can’t stay up. The dismal employment figures released last Friday caused the world bond market to push rates even lower.
Like the hike that will probably come today, the June move made the Fed look completely out of step with economic reality. It erodes confidence.
In last Thursday’s column I said that Wall Street would be wrong when the employment numbers were released the following morning.
With the experts expecting growth of anywhere between 215,000 and 300,000 jobs, the stock market was jolted when the actual increase for July was a meager 32,000 and June’s already modest gain was reduced by 34,000 jobs.
Most people are having a problem predicting the economy these days because I believe there is a difference between what is really going on and what the statistics say.
The economy seems to be growing – but only moderately. The peaks (as we saw earlier this year) and the valleys (as we appear to be going through now) could simply be statistical distortion.
For instance, the good growth in jobs this spring occurred only after the Labor Department made some very generous seasonal assumptions about positions being created at new companies. These companies might not really exist and, so, the jobs they are supposedly creating could also be make-believe.
In Friday’s jobs report, the Labor Department removed 91,000 jobs from the count for companies it believed – but couldn’t prove – went out of business in July. Without that assumption, growth during the month would have been a still anemic – but slightly more acceptable – 123,000 jobs.
But the problem goes deeper than that.
Most forecasters based all their predictions for jobs on how fast the GDP is growing.
But what goes into these GDP calculations has been changed so much over the past decade that 3 percent annual gross domestic product growth today isn’t nearly as strong as it would have been a decade ago.
The main reason is that the government has altered the way it calculates inflation, mainly so that Washington can pay less in cost of living increases to Social Security recipients and others.
Not only is the economy broken because neither the Fed nor Congress can do anything, but the experts are being deceived en masse.