With wage increases lagging inflation, consumers’ real incomes are falling. If not the Federal Reserve Board and chairman, the Federal Reserve’s staff economists should know that falling real incomes are an unlikely cause of demand inflation. It’s a sign of stress, not exuberance, that consumers are having to go deeper into debt in order to make ends meet.
Previously, I argued that the Federal Reserve was trying to combat a supply-side inflation with ineffective demand-side measures. An alternative explanation is that the Federal Reserve is raising interest rates for reasons independent of inflation.
Perhaps the Federal Reserve is worried about the unintended consequences of the sanctions placed on Russia, which are having serious effects on Europe rather than on Russia. The sanctions have encouraged the move away from the use of the U.S. dollar to settle trade differences between countries, with the dollar’s use shrinking toward being the reserve currency only of the Western part of the world, while other parts of the world are beginning to settle accounts in their own currencies. A shrinkage in the dollar’s use lowers its exchange value relative to other currencies, and the Federal Reserve might see higher interest rates as a way of supporting the value of the dollar. A lessening of the dollar’s use as a world reserve currency might explain the decline in the dollar index from 114 last September to 102 on Jan. 13.
Alternatively, the Federal Reserve might see higher interest rates as an inducement to foreigners to continue to finance the massive $1 trillion-plus U.S. budget deficits by purchasing U.S. Treasuries.
When the Federal Reserve makes mistakes as it did when it caused the Great Depression by allowing the U.S. money supply to shrink, or when financial speculation threatens the system with bankruptcy requiring Federal Reserve rescue, it’s the people who suffer the consequences.