Nice and Easy at the Fed

Related stories: 06/11/04 Global interest rates up as inflation looms 06/07/04 Finally, a sustained surge in US job growth 04/21/04 Economy hot. Will rate hikes follow?

Get all the Monitor's headlines by e-mail. Subscribe for free.

E-mail this story Write a letter to the Editor Printer-friendly version del.icio.us [ What is this? ] digg [ What is this? ]

It was the first increase in four years, and marked the end of an extraordinary 46-year low in the cost of borrowing. The easy money fueled a housing boom and consumer-spending spree that helped America recover from the dotcom and stock-market busts, and the economic aftershock of Sept. 11, 2001.

But now that economic growth and job creation are solidly under way, it's the right time for the Fed to ease up on the accelerator and begin a series of small rate increases over time. This is to protect the country from the possibility of an overheated economy and the corroding inflation that can accompany it.

Prices rose with unexpected vigor in the spring, and the Fed has been criticized for not acting sooner. In announcing its modest upward tick of a quarter of a percentage point, however, the Fed indicated it was not too concerned about inflation - yet - and said that some factors behind the price rises are "transitory." In any case, considering the rock-bottom rates, the Fed has room to ratchet rates up further.

Higher interest may be uncomfortable for some, but the Fed, by telegraphing its plans well in advance, has done its best to soften the blow. Its transparency is a welcome change from the secrecy of past decades.

And plenty of people will actually benefit from higher interest rates. Retirees on fixed incomes, who keep their investments in conservative instruments like certificates of deposit, will be delighted to see a higher rate of return after so many lean years.

There's no question that even a small increase will temporarily hurt low-income Americans, people who can just barely afford the adjustable-rate mortgage on their first home, or who are heavily in debt - a growing and troubling trend in the US.

But the Fed's interest-rate lever is not the proper tool for this consumer-debt problem. For that, there are other means: bankruptcy law that isn't too tough on debtors; tax policy that benefits low earners; better schools; and a higher minimum wage.

Besides, the very fact that the Fed is increasing rates now means it has confidence in America's economy and its ability to create jobs. With robust growth, new jobs and higher wages will embrace those on the bottom rungs of the economic ladder. And if a series of modest rate increases help wean Americans from excessive indebtedness, all the better.