THE decision by the Federal Reserve Bank to leave a key lending rate at 2 percent is not likely to alter the sagging state of the American economy. It was the first time since last September that the board had chosen not to lower interest rates.
The Fed moves interest rates up to fight inflation and down to stimulate a sluggish economy. While today's economy is very droopy, there is also inflation, 4.18 percent last month, which has hit Americans hard through rising energy and food prices.
Caught between these two bone crushers, the Fed took the only reasonable course - not to move the rate. If it had raised it to stifle inflation, there was a risk that the economy might have stalled further. Consumer confidence is already at its lowest level since 1992, this in spite of $107 billion in tax rebates sent out by Washington.
The roots of the problem are manifold. Fuel prices continue to rise, in spite of the fact that Saudi Arabia agreed to increase production starting July 1. The crisis in housing caused by fraud and folly in the subprime mortgage market is playing out in foreclosures and in lower real estate values. Unemployment is rising.
Part of the problem remains government spending that is not matched by revenue. The latest example is passage by the House of a $186.5 billion omnibus spending bill, including $162 billion for the Iraq and Afghanistan wars, higher education benefits for veterans, extension of unemployment payments, and money for flood relief. This sum, of course, will not be covered by tax revenues but will instead be added to the $9.2 trillion in national debt destined for future generations to pay.
Congress' failure to act should play out this November in the massive replacement of incumbents. The nation is already assured of a new administration in the White House.
The scary part is whether the nation's new leaders will have the courage to tackle the mess they will inherit.
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