Lose-Lose Fed Follies
HOW much will the Federal Reserve cut interest rates when Chairman Jerome Powell makes his announcement Wednesday? That’s the predominant question business reporters posed this week — but it’s the wrong one.
Why? Because the Fed is in a lose-lose scenario whatever it does: No matter how big or small the cut, it will produce more financial pain for American families.
That’s especially troubling given how much people’s budgets are already stretched amid the current cost-of-living crisis. The dollar has lost one-fifth of its value in less than four years, and families have racked up over $1.1 trillion in credit-card debt trying to make ends meet.
The deadly combination of high outstanding balances and high interest rates means that, for the first time ever, Americans are paying over $300 billion a year just in finance charges on their credit cards — before putting a dime toward the amount owed.
It’s a similar situation in the housing market, with record-high home prices and interest rates almost three times their level from four years ago.
Potential homebuyers now have to borrow much more, and must pay a premium to do so. That’s why the monthly mortgage payment on a median-price home has doubled since the start of the Harris-Biden administration in January 2021.
If high interest rates have inflicted so much financial pain on Americans, isn’t there cause for rejoicing at the prospect of lower ones? Not quite. This is more like monetary whack-a-mole, where the Fed attempts to solve one problem but creates another — continuing a cycle that’s been going on for four years now.
We forget that the interest rate is a price, specifically the price to borrow money. When Congress started spending trillions of dollars we didn’t have during the COVID pandemic in 2020, the Treasury had to borrow that money — but there wasn’t enough available from the private sector.
High demand for borrowing coupled with low supply of loanable funds would’ve pushed interest rates to stratospheric levels and made it impossible for the Treasury to borrow all the money Congress wanted to spend. That’s why the Fed pushed interest rates down to zero and literally created the money for the Treasury to borrow.
Even after 2020, Congress and the Harris-Biden administration kept their collective foot on the spending gas, and the Fed obliged with trillions more in new money. That gave America 40-year-high inflation, which devalued the dollar by 20%.
And the spending spree continues, more than four years after it began. The deficit for this fiscal year will exceed $2 trillion. The runaway borrowing by government has been the ultimate driver of today’s higher interest rates.
If Powell & Co. artificially reduce interest rates in this environment, it will be cheaper for consumers, businesses and the government to borrow.
That’s a short-term tonic, but it can’t address the underlying problem of too much government spending and borrowing.
The result will be exactly what it was before: inflation.
Pumping more cash into this economy would be like giving alcohol to someone trying to get sober — it may feel good at first, but the hangover will return. What the person really needs is to stay on the wagon.
In this case, that means fiscal and monetary restraint. America needs Congress and the White House to cut spending and the deficit, while the Fed focuses exclusively on preventing inflation.
Instead, we have a White House and most of Congress hell-bent on spending this country into the ground. That leaves the Fed in a no-win situation.
If it cuts rates, it risks spawning more inflation; if rates stay where they are, borrowing costs for consumers and government alike will stay punishingly high. (The Treasury is already spending over $1 trillion a year just in interest on the federal debt.)
Yet the Fed deserves no sympathy. It was the Fed that created trillions of dollars for the Treasury to borrow, manipulated interest rates for years, gave us 40-year-high inflation, created asset bubbles and froze over the housing market.
The Fed made this financial bed, but now we all must sleep in it.