SINGAPORE: As the US Federal Reserve (equivalent to its central bank) continues to raise the interest rate by which it extends short-term loans to major financial institutions, I have elaborated on the negative side effects of the move, such as the almost inevitable result of economic recession and the eventual unattainability of the Fed's avowed goal of containing heightened inflation. I further called on the Fed to detach itself from its continued obsession with maintaining US inflation at around 2 percent which has no convincing basis in economics and is at most an attempt to balance the deleterious effects (declining spending power) of inflation with ironically its more efficacious ones (stimulating business growth). Instead, the Fed should be open-minded in experimenting with other calculations in arriving at its decision on varying interest rates.
One suggestion on my part would be for the Fed to consider stopping its raising of the interest rate if the rate has risen to within 2 percentage points below the prevailing inflation rate, even if the inflation rate does not fall momentarily to the Fed's most coveted 2 percent. This is mainly to prevent the Fed's obsessive raising of the interest rate as long as the inflation rate does not drop to around 2 percent, even to the extent of the interest rate overtaking the inflation rate, as was the case in the early 1980s. At the time the double-digit interest paid by American banks attracted large amounts of deposits from not only the average Americans but also overseas depositors eager to rake in the high American interest payouts. But although American banks were then brimming with deposits, they managed to issue few business loans, as businesspersons often could not afford the high interest to be repaid. As such, the US recession then could not be reversed, at least not until President Ronald Reagan famously pushed through massive tax cuts.
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