Federal Reserve policymakers and critics labor under false assumptions. Hawks believe tighter credit can stave off inflation. Doves hew to lower rates to mitigate risks of recession.
Rocketing oil prices may accelerate inflation, while the credit and housing crises and the huge trade deficit threaten recession. However, these cannot be countered adequately by modulating interest rates.
China and India are growing 10 percent a year, causing global oil demand to outrun supply and pushing prices to near $100 a barrel. The United States consumes only one-quarter of the world’s oil, and accounts for a smaller share of growth in demand. Trimming U.S. gross domestic product with tight credit would slice an inconsequential fraction off global oil consumption and little affect broader U.S. inflation. Yet the drag of tight credit and higher gas prices on consumer purchases, together, could sink the U.S. economy.
The grip of foreign oil can be relieved only by higher auto mileage standards and tougher conservation measures, and by further developing domestic petroleum, nuclear and alternative energy sources. Neither political party has demonstrated the courage to ask Americans to do what is necessary.
Over the next 18 months, 2 million adjustable-rate mortgages will reset to higher interest rates, and many homeowners cannot afford the payments. Without viable refinancing options, many homes will go on the market. The negative consequences for consumer spending and unemployment are obvious.
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