Characterizing the effects of Hurricane Katrina on the economy as “short-lived”, the Federal Reserve Board of Governors (the Fed) voted yesterday to raise the federal funds rate once again, to 3.75 percent.
The federal funds rate is the rate of interest which banks charge each other.
The impact on businesses and consumers is that when the Fed raises rates, commercial banks raise their prime rate. The prime is the benchmark for many millions of business and consumer loans.
As a result of the Fed’s action yesterday, the prime is now 6.75 percent, its highest point in over four years.
The Fed rationalized its decision based on its fear that inflation will rise as a result of an increase in energy prices (read the price of oil). This contrasts with a broader and possibly more humanitarian concern with business and job growth.
There are 10 members of the Fed’s Board of Governors, including its chair, and one of them dissented, voting to keep the federal funds rate the same.
The Fed continues to bet that the economy will grow in spite of the 11 consecutive increase in the federal funds rate since June 2004 and in spite of the impact of Katrina.
However, economists are predicting that Katrina will decrease economic growth by 0.5 percent this year (3.6 versus the pre-Katrina estimate of 4.1).
This doesn’t, of course, take into account the impact of Hurricane Rita, or any future storms, which could be so numerous that we may exhaust our alphabet and start naming them “Alpha” and “Beta”.
Very, very smart, knowledgeable people make statements all the time about the Fed’s impact on the economy, and many of them are wrong.
So, I won’t even attempt a macroeconomic analysis here, not that I could anyway. I’ll just ask one simple question:
Are you financially better off now than before June 2004, the month in which the Feds started raising rates?
(Answer)
Yeah, that’s about what I thought.
Me, too.