Federal Reserve Chairwoman Janet Yellen has finally indicated that after seven years of holding its benchmark interest rate at near-zero, it may soon raise that rate to 0.25% or 0.5%. At the same time, rates strategists at Citi predict next year China will drop its interest rate to zero in response to its economic collapse while the US economy will fall back into recession. Such predictions will, of course, stoke fears that a rate hike in the US could halt job creation, accelerate income inequality, and help worsen a global recession on the horizon.
Where Republicans tend to be the ones calling foul on the Fed and trying to exert their political will onto the powerful and independent body over concerns of inflation, Democrats are the ones protesting a rate hike, because they fear the policy shift will slow economic growth and exasperate growing income inequality. What will be most interesting is if a small increase in the interest rate actually helps the US economy and eases poverty.
If not for the GOP seeking an end to the Fed’s stimulus program, greater Congressional oversight might be an achievable political goal. What makes a takeover of the Fed so tempting is that the Fed is essentially responsible for engineering small economic downturns when the economy appears to be growing too fast in order to prevent major crises. It would seem the Fed has failed given the ongoing fallout of the Great Recession, but the economy would have been in a far worse state with far less opportunity for recovery, if the Fed had not existed.
Although the Federal Reserve Bank does submit to Congressional oversight, the decisions of the Board of Governors are based on expert analysis and opinion; whereas, Congressional leaders tends to act slowly on the politics of the day, not sound, responsive policy decisions. Political influence over the Fed might be convenient and appealing when the Fed makes mistakes or adopts controversial policies, but it would be overall disastrous.
With that in mind, the likes of Ellen Brown have been decrying the abuse of low-interest rates by Wall Street banks to profit at the expense of Main Street since 2010. In essence, banks have been able to get free money from the Fed for seven years in the form of interest-free loans. Instead of loaning this money to smaller banks, businesses, and individuals at super low rates to spur economic growth and job creation, they have been using the money to invest in bonds, commodities, and stocks.
By intentionally driving down the cost of borrowing, specifically for banks, the Fed made loans to Main Street businesses, which carry the risk of failing, far too unattractive. Meanwhile, borrowing to fund the purchase of bonds, stocks, and the other financial investments of Wall Street with greater performance became far too lucrative for banks to ignore. By driving up the cost of lucrative investments, interest-free loans turned these “investments” into far more lucrative guarantees and helped create the very economic bubbles that are often responsible for economic collapses
In turn, this has helped inflate the value of investments and allowed Wall Street to cash out at the expense of other investors. Not only has this practice cost the American People in terms of higher-interests rates, weak real world economic growth, lackluster business creation, and the expense of providing Wall Street free investment loans, it has allowed Wall Street to redirect money away from the retirement investments of average Americans.
Moreover, it appears the Fed’s policies may well have driven economic growth that has created greater poverty and income inequality when it intended to create jobs and other opportunities to disperse the nation’s wealth. The blunt truth is that an economy built on policies geared toward creating financial capital, versus intellectual and/or labor capital, is an economy that will drive wealth into the pockets of those who hold the most financial capital, i.e. the already wealthy.
It is also the kind of economy that inhibits real economic growth and destroys wealth by neglecting the economic interests. Distorting effects like this represent the destructive macroscopic impact faulted economic policies can have on the US economy. The ripple effects of such policies, of course, tend to influence the entire world due to the size of the US economy. Consequently, a small rate hike by the Fed may seem insignificant, but it can mean the difference between economic growth and recession.
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