Editorial Roundup: Economy: Reconsider fed interest rate policy

Published 8:50 pm Friday, September 29, 2023

For all the exhortations President Joe Biden makes about building the economy from the middle class out, he should apply the same thinking to the Federal Reserve’s policy of interest rate hikes.

Interest rate hikes hurt the middle class more than the wealthy, and the idea of using them to hold down inflation may be old-fashioned if not outdated.

The Center for American Progress notes that low income families owed the equivalent of about 9.5% of their income on credit cards, while the middle class owed about 5.2% of income equivalent and high-income families owed debt equivalent to 2.3% of their income.

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Credit card debt reached a 20-year high in 2023 at $1.03 trillion.

Last week the Fed decided it would not raise interest rates for now and leave them at their 22-year high. But the unelected board of bankers hinted and others predicted it would raise them one more time before the end of the year, in a Grinch-like fashion possibly just in time for the holiday shopping season.

Interest rate hikes hit credit cards and car loans hardest, with home mortgage rates next — rates that are the highest in decades. The increased cost falls on those who need credit cards once a while or often to buy basic necessities like food, clothing and even health care.

One can argue that Fed’s action will tamp down inflation and that will indeed benefit the middle class. But raising interest rates still strikes us an unfair tax put on the middle class to subsidize lower prices for everyone, even those who buy yachts and other luxury items.

And while Biden comes from a long history in the Senate where the Federal Reserve policy was almost never questioned, we’re now in different times. Financial markets have become complex, and it seems there’s a financial instrument to hedge against everything one can imagine, maybe even things like the Yankees not making the playoffs.

And there very well be many forces that push back against the idea that higher interest rates will lower inflation.

In fact, the yield on the 10-year Treasury note reached a 16-year high last week at a yield of 4.4 compared to 3.56 a year ago. Experts say the mortgage rates and car loans track the Treasury note rates closely, and thus higher yields on the note do the same thing a hike in interest rates would accomplish — reduce demand for cars and homes.

There may be no need for Federal Reserve intervention in today’s growing economy. As it stands, 12 of 19 members of the Fed board believe they will have to raise interest rates one more time this year.

But President Biden should remember that’s a tax on the middle class.

— Mankato Free Press, Sept. 24

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Editorials from newspapers around the state of Minnesota.

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