Bonded to Investors

Why has the Federal Reserve Board recently raised the interest rate four times? To stop inflation. But why did the Fed do it when there was no evidence of inflation? The accepted answer is that the Fed was afraid that inflation was on the way because, they said, the jobless rate of 6.4% was too low. So, why didn't the Fed simply raise the interest rate to a full 1.25% to begin with rather than drag it out? Here we get silence. The Fed can not say it was waiting to see whether its first three steps were successful because there was no inflation to check in the first place.

What seems to have been behind this creepy process was a kind of collective bargaining between the Fed and a faceless, bodiless creature called "the market." In a news story in one of America's prestigious dailies, the knowledgeable reporter notes: "Even though the Fed had raised short term rates three times since February, these actions were deemed insufficient. But now, and for the time being, the markets seem satisfied."

So, what and who are these mysterious gremlins who tell the Fed what to do? Hobart Rowan, economic columnist for the Washington Post, offers an answer. "Wall Streeters demand that the Fed, which has already taken three "pre-emptive" strikes against inflation by raising short term interest rates . . . do even more." These persons, under the disembodied name of "Wall Streeters," have a special way of communicating their wishes: When Uncle Sam puts securities up for sale, they refuse to buy.

These "Wall Streeters" are the bond traders, Mr. Rowan writes, who "would prefer to see the economy slow to a growth rate of 2 percent." In fact, he continues, "If the truth were told, Wall Street would love a real recession because it would propel bond prices higher."

So "the market" is the bond traders who would like to push America into a recession. Out to depress the American economy, bond traders spoke in their special language to the Fed; the Fed kowtowed to its master. Should more people find jobs, the interest rate will go up again to make sure that not too many Americans are employed. Should such a man-made recession slip into a depression, the bond traders can always blame "the market."

Reprint from "Forward" June 3, 1994

Copyright © 1996. The Light Party.

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