Economist Says Fed Should Lower Interest Rates

Published on: 15:45PM Jul 30, 2008

Mike Walsten

Longtime LandOwner Newsletter economic consultant Dr. Vincent Malanga argues the Federal Reserve Board should lower the Fed funds rate to ward off a further weakening in the U.S. economy. But he worries the Fed may be too concerned about inflation and could boost rates at the first signs of a growing economy. He feels that such a move could prove a disaster for the economy.

In his most recent Economic Commentary, the President of LaSalle Economics, Inc., states: "There is good reason for believing commodity prices will be better behaved going forward. Agricultural commodity supply is benefiting from improved weather worldwide, while demand is easing. Energy supply is not improving, but demand destruction is clearly underway. In the U.S., gasoline usage is down 2.4% from last year -- the largest such drop in more than thirty years. In China, gasoline rationing and business shutdowns are in place in order to 'clear the air' for the Olympics. Globally, economic growth is ratcheting back as Central Banks fight inflation and equity markets slip into bear territory. Finally, many nations are reducing subsidies to consumers, causing them to use less gasoline and buy fewer goods and services."

This weakening demand should be applauded by the Federal Reserve, Malanga asserts. But he fears that if gas prices fall too sharply, such as a 50 cent decline at the pump, the Fed may respond by raising interest rates for fear of rising inflation. That would be the wrong move to take, he writes.

"We think the credit crunch is firmly entrenched, real earnings are under pressure despite lower inflation because employment and income growth are slowing, and home equity extraction is non-existent amidst low savings. With labor costs low, commodity prices now easing and worldwide demand growth slowing, Central Banks should start worrying about deflation, not inflation. So to even consider raising interest rates would be a huge mistake in our view. Indeed, the Bank of Japan prematurely raised rates in 1994, ushering in renewed economic weakness and deflation and a lost decade for Japan. We do not want a repeat of that sad story," he concludes.

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