Unemployment Rate Rises, Fed to Blame

Today the government announced that the United States unemployment rate rose from 4.7% to 5.0%. The rise in the unemployment rate cannot be a surprise to anybody who understands economics. Over the three year period from 2003-2006 the Federal Reserve raised the fed funds rate from 1% to 5.25%. A massive increase over a relatively short time span. The rise in the unemployment rate announced today is a direct result of that massive rate rise.

By raising the fed funds rate by such a massive amount over a short time frame the Federal Reserve caused all short-term borrowing costs in the United States to likewise rise by a massive amount. An amount that was just too high for many borrowers to handle. Over the last six months those high rates have come home to roost and default rates on loans have skyrocketed. Financial institutions have taken massive write-offs with promises of more to come.

The Federal Reserve's response to the rising default rates and ever larger write-offs has been tepid at best. The Federal Reserve has lowered the fed funds rate back down to 4.25% but the rise in the unemployment rate and ever larger write-downs being taken are clear signals the Federal Reserve has not done enough. Not even close to enough. Had the Federal Reserve addressed this problem properly when it first began to become clear that short term interest rates were far too high for most borrowers to handle, or at any time since, the unemployment rate would not have risen and the financial write-offs would have stopped.

The Federal Reserve needs to lower the fed funds rate to a much more reasonable rate and it needs to do so before any more damage is done. A rate which short term borrowers can handle in this economic environment. The Federal Reserve's excuse for not already doing so is that they are afraid of inflation. An excuse so ludicrous it's almost beyond belief but of course we are dealing with the Federal Reserve here. Nothing they ever do should ever surprise anyone. The level of incompetence the Federal Reserve has displayed throughout its existence is breathtaking.

When financial institutions are taking massive write-downs inflation will not be a problem. If low interest rates causes inflation then why has Japan had the lowest interest rates on the planet since the late 1980's and no inflation?

The blame for the rise in the unemployment rate has already begun. Congress and the President will no doubt blame each other and the American people will blame both. Blame that is misdirected. The root cause of the rise in the unemployment rate is the massive increase in short term interest rates orchestrated by the Federal Reserve. The Federal Reserve deserves all the blame.

As financial institutions take ever larger write-downs the people who were running those companies have been held accountable and most have been fired. As the Federal Reserve raised the fed funds rate by such a massive amount and then responded so timidly to the damage those massive rate hikes caused has anybody from the Federal Reserve been fired? As Americans lose their jobs and their homes as a direct result of what the Federal Reserve has done has anybody working at the Federal Reserve been let go?

The politicians did not raise short term rates by massive amounts and cannot directly be blamed for doing so. But for not holding the people running the Federal Reserve accountable for their actions is something the politicians must be blamed for. All the people who orchestrated the massive increases in short term borrowing rates in the United States economy from 2003-2006 deserve all the blame for the rise in the unemployment rate and those still working at the Federal Reserve should be held accountable and pay the price for their incompetence.