The decision Wednesday by the Federal Reserve Bank to leave the federal funds lending rate at 2 percent is not likely to alter the sagging state of the American economy. This was the first time the board made a choice not to lower interest rates since last September.
The Fed generally moves interest rates up to fight inflation. It moves them down to provide stimulus to a sluggish economy. The American economy is currently very droopy. But there is also inflation, 4.18 percent last month, which is brought home sharply to Americans through rising energy and food prices.
Caught between these two bone crushers, the Federal Reserve's Open Market Committee took the only reasonable choice -- not to move the rate. If it had raised the rate to stifle inflation, there was a strong risk that the economy might have stalled out. Consumer confidence is already at its lowest level since 1992 -- this in spite of some $107 billion in tax rebate checks that Washington has sent out.
The roots of the problem are manifold. Fuel prices continue to rise, in spite of the fact that Saudi Arabia agreed to increase production starting July 1. The crisis in housing caused by fraud and folly in the subprime mortgage market is playing out in foreclosures, at worst, and, at best, in sickening drops in the value of people's primary asset, their homes. Unemployment is rising.
On the national level, part of the problem remains government spending that is not matched by revenue. The latest example is passage by the House of Representatives of an omnibus spending bill, including $162 billion for the Iraq and Afghanistan wars, higher education benefits for veterans, extension of unemployment payments and money for flood relief, amounting to a total of $186.5 billion. This sum, of course, in part because of the weak economy, will not be covered by increased tax revenues and will instead be added to the $9.2 trillion in national debt destined presumably for future generations to pay.
Congress' failure to act should play out this November in the massive replacement of incumbents. The nation is already assured of a new administration in the White House. The scary part is whether America's new leaders will have the courage to tackle the mess they will inherit.
First Published: June 27, 2008, 4:00 a.m.
