The Shadow Behind the Proposed Fed Interest Rate Hike

Sandwichman, pitching in while Max is otherwise occupado, got my attention:

In his Salon column today, Jamie Galbraith questions the conventional wisdom about the Federal Reserve rate increase widely expected this week. As Galbraith reminds us, the mechanism by means of which an interest rate increase is supposed to control inflation is rather crude and not particularly relevant to the sources of the current inflationary uptick:

Most who comment on this topic treat rising interest rates as a necessary, inevitable, irresistible reaction to rising prices. The motivation and the mechanism are beyond the scope of an intelligent question. And so the press does not ever ask what the exact link from rising interest rates to inflation control might be.

For members of the Federal Reserve, which meets in private, there is no similar excuse. They know. They know that the only reason to raise interest rates is to slow down the economic growth rate and so to increase unemployment. Their theory -- the only theory they've got -- holds that rising inflation is a consequence of labor markets that are too tight, of unemployment rates that are too low, of wages rising faster than prices and rising real wages squeezing real profits.

But wait. We know this is not the case...