Since June 1999 the Fed has progressively raised overnight interest rates from 4.75 to 6.5 percent. The idea is to control a speculative boom without causing a recession or condoning higher inflation. The problem is not that the Fed is inept. It is the unavoidable instability of speculative booms. Every speculative boom will, if left alone, ultimately collapse.
People become poorer as real estate or stock portfolios lose value.
Anyone who borrowed to buy overvalued assets is squeezed. Some families and firms go bankrupt. The Fed faces a dilemma. For seven years, consumer spending has increased faster than consumer income. Americans have spent more of their incomes because the strong stock and job markets have bolstered wealth and confidence.