Opinion pieces and speeches by EPI staff and associates.

THIS STATEMENT RELEASED ON FEBRUARY 3, 2000.

INTEREST RATE HIKE WILL HURT LOW- AND MIDDLE-INCOME WORKERS

by EPI President Jeff Faux on Federal Reserve Interest Rate Increase

Washington, D.C. — “The Federal Reserve Board decision to raise the federal funds and discount rates is a mistake,” said Jeff Faux, president of the Economic Policy Institute in Washington, D.C.

“The Fed’s action risks higher unemployment, increased housing costs, and will weaken the bargaining power of low- and middle-income workers, whose wages — after stagnating for most of the 1990s — have been rising recently because of tight labor markets. By raising the value of the dollar, higher interest rates will also aggravate our huge trade deficit, destroying more U.S. manufacturing jobs.

“In the absence of any sign of inflation, these risks are unnecessary. The core consumer price inflation index rose at an annual rate of only 1.9 percent in December, compared with 2.4 percent a year ago. The Federal Reserve’s own numbers show the capacity utilization rate at 81.3 percent, substantially below the 85.4 percent reached in 1988-89, at the peak of the last business cycle.

“In addition, the Employment Cost Index — the statistic said to be most watched by the Fed economists — rose in December 1999 at nearly the same rate it rose in December 1998 and 1997. Given that business productivity is rising at about 4.5 percent per year, there is no danger of wage-push inflation.

“If the Fed is concerned with ‘irrational exuberance’ in the stock market, the appropriate response is to limit borrowing to buy stocks. Fed Chair Alan Greenspan has refused, on the grounds that this might disadvantage some stock market investors. Perhaps it will.

“But raising interest rates to engineer an economic slowdown will clearly disadvantage the most vulnerable of our workers. Many of them are barely surviving, and few buy stocks on margin.”

[ POSTED TO VIEWPOINTS ON FEBRUARY 3, 2000 ]

Jeff Faux is the president of the Economic Policy Institute. He is the author of The Party’s Not Over.