Fed Up

The days of "free" money may be over.

  The Federal Reserve takes its turn at bat next week, when the Open Market Committee meets to listen to more pitches to raise interest rates.
   The issue is whether the U.S. economy has recovered enough to slow the flow of cheap money and let the body politic walk on its own. Wall Street investors and corporate executives, however, have gotten so used to borrowing at near zero interest rates that they may become skittish at the mere mention of an end to "free" money.
   Meanwhile, credit card firms charge consumers upwards of 20 percent or more in interest, even as they tap into the banking system for operating cash for nearly nothing. At the same time, savings accounts reward conscientious consumers with an interest rate of less than 1 percent, and inflation kicks up prices at double that rate.
   This means there is no reward for thrift. Setting money aside in a savings account only leads to a loss in the purchasing power of a dollar. If prices rise at 2 percent and savings accounts pay less than 1 percent interest, you are in effect losing money. As well buy now before prices rise again, but that means depleting a savings account, leaving no hope for a secure future.
   On the other hand, why reward greedy vendors as the wealth gap widens?
   Taking a larger view, the Fed's job is to modify the flow of money to help when the economic cycle is down and to stabilize the economy when things look good. Things did not look good during and after the Great Recession, but have improved somewhat steadily since 2008.
   So the issue before the Fed next week will be whether the economy is healthy enough so the Central Bank can reduce its pump-priming efforts. The dangers are that as interest rates rise, so will prices, and if wages remain stagnant, workers will suffer, as will pensioners. However, those who rely largely on interest income will be better off, and the wealth gap will widen.
   At the same time, firms and investors who have relied on cheap money to finance their activities may be frightened into cutting back production and investment, thus putting the country at risk of another downturn.
  It has happened before, in 1938 when government efforts to support the economy during the Great Depression were scaled back, and the nation stumbled again, until wartime investment in military material rescued the economy from its downward spiral.
   War, however, is a terrible price to pay for economic health, and is no way to win a ball game.