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Economists Grumble Over Interest Costs

ECONOMIST James Galbraith has a personal complaint with the Federal Reserve's tighter monetary policy. The jump in interest rates since February is costing him about $2,000 a year in extra payments on his adjustable-rate mortgage. And the impact of higher interest rates on stock and bond prices has depressed the value of his mutual funds by about 5 percent.

''I regard this as Alan Greenspan's doing,'' Mr. Galbraith says, referring to the chairman of the Fed.

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Millions of other Americans have suffered a similar fate, paying more interest on car loans, mortgages, and other debts, and seeing their investments lose value. ''It is a huge transfer of wealth from the middle class to the rich,'' says Galbraith, a professor at the University of Texas at Austin.

So far, there doesn't appear to be any popular uprising over interest rates. The public seems to have accepted the argument of the Fed and Wall Street that a sterner monetary policy will prevent inflation from picking up steam.

But Jeff Faux, president of the Economic Policy Institute, a left-of-center think tank in Washington, sees some ''straws in the wind'' that public acceptance may fade.

One is that Sen. Paul Sarbanes (D) of Maryland, chairman of the Joint Economic Committee, is using higher interest rates as a campaign issue, apparently with some success. If reelected as expected, Senator Sarbanes will become chairman of the Senate Banking Committee, with a major role in congressional oversight of the Fed.

A second is the fuss that resulted from a statement made at a Fed conference in Jackson, Wyo., late last month by Fed vice chairman Alan Blinder. He said the Fed must consider unemployment and inflation in making monetary policy. This has raised the volume on discussion of Fed policy since Mr. Blinder is President Clinton's first Fed appointee.

To Galbraith, the Fed's singular focus on inflation is wrong economically and contrary to laws passed by Congress that instruct the Fed to consider full unemployment and price stability in drafting policy. ''Many members of the Fed are ignoring this legal mandate,'' he charges.

Mr. Faux finds objectionable the implication of the Fed's goal of slowing the expansion that ''the economy today is as good as it's going to get.'' That means, as he sees it, that the millions of people working part time will not likely get full-time jobs, that the discouraged worker will find little encouragement in the job scene to go back to work, that unemployment will remain at about its 6.1 percent level, and that many people will find it necessary to work more than one job to make ends meet.

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The Fed, Faux charges, is a ''central bank essentially owned by the [commercial] banking system.'' Its higher interest-rate policies are helping bank profits.

But policymakers at the Fed resent such allegations. They figure that their policies are good for the economy and most people. Fed economists maintain that if the economy grows so rapidly that unemployment slips below 6 percent or perhaps 6.2 percent, the rate of inflation will pick up. Indeed, Jerry Jordan, president of the Federal Reserve Bank of Cleveland, argues that critics have it backward: Monetary-policy actions aimed at stabilizing the purchasing power of money are the best way to enhance real gro wth in the long run, he says.

Galbraith maintains that the Fed's concept of a ''nonaccelerating inflation rate of unemployment'' -- the 6 percent rate -- is outdated by globalization of the United States economy, with low wages abroad keeping down wage and price hikes in the US.

Michael Keran, the chief economist at Prudential Economics in Newark, N.J., and a former Fed economist, doesn't accept Galbraith's thesis. He says any impact of imports and wages abroad on US inflation is difficult to measure. But Mr. Keran does hold that the economy still has considerable slack in industrial capacity and labor supply -- unemployment could fall to 5.5 percent before inflation would accelerate. So the Fed could let the economy grow at a 3 percent to 3.5 percent annual rate for some time, ra ther than slowing it to about 2.5 percent.

Faux complains that ''the Clinton administration has been less willing to stand up to the Fed than the Bush administration.''

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