Last May, the Federal Reserve hiked interest rates by half a percentage point, the sixth and final act in a campaign to stamp out perceived inflation that stretched from mid-1999 to mid-2000. At the time, the media applauded: "The biggest Fed rate hike in five years," announced NBC’s Mike Jensen on the May 16 edition of Nightly News. "Good for the economy, good for Wall Street, but," Jensen allowed, "another blow to borrowers."

After a 22-year career with NBC, Jensen retired on December 15, so he wasn’t around to revise and extend his remarks in the wake of the most recent meeting of the Federal Reserve’s Open Market Committee (FOMC) on December 19. The past seven months have offered considerable evidence that the Fed’s May rate hike may have been the straw which finally broke the economy’s back:

• Unless shoppers race to the malls on Christmas Eve weekend and really start spending, retail sales growth will be the weakest in several years. "For the holiday shopping period, sales are down 8.2 percent, compared with the same period last year," the Christian Science Monitor’s Ron Scherer reported on December 20. 
  
   
• Major technology companies such as Microsoft, Sun Microsystems, Cisco, Hewlett-Packard and IBM have seen significant declines in their overall market capitalizations, as warnings of flat or declining earnings have provoked intense investor selling over the past few months. Also under pressure from the Clinton Justice Department, shares in Microsoft — once the largest company in the world — have dipped from a high of nearly $112 on March 23 to less than $42 a share, a 63 percent decline in only nine months.
  
   
• And it’s not just the technology sector: "Profit troubles that used to be confined to tech companies have spread to appliance makers (Whirlpool), consumer tool manufacturers (Black & Decker) and industrial suppliers (Illinois Tool Works)," USA Today business writers George Hager and Dina Temple-Raston noted in a December 20 story.

When the Fed last acted on May 16, the NASDAQ closed at 3717.57. On December 20, the NASDAQ finally landed at 2332.78, a drop of 37 percent. The devaluation of NASDAQ stocks doesn’t just hurt investors’ portfolios and retirement funds; the crash also indicates a sudden scarcity in the capital funds needed for research and expansion, a money crunch that could affect the economy for years.

Was all of this foreseeable last May? It was to Larry Kudlow, a free market economist who worked in Ronald Reagan’s administration. Back in May, Kudlow wrote in an op-ed published in the Washington Times that "with price reports holding steady in April, a Fed move to aggressively raise the overnight policy rate by 50 basis points can signal only one objective: a determined effort to depress economic growth."

Explaining the Fed’s logic, Kudlow related that "The Fed... is wedded to the Phillips Curve, a theory asserting that declining unemployment generates rising inflation. This model has completely broken down in recent years (for the umpteenth time since World War II), as a combination of productivity-enhancing technology breakthroughs, a lower capital-gains tax rate (promoting record venture capital investment) and low inflation (to hold down long-term interest rates), has expanded the economy’s long-term potential to grow."

Correctly anticipating that the Fed wouldn’t take his advice to leave interest rates alone, Kudlow predicted that "if the Fed sticks to the Phillips Curve and insists on aggressive moves to dampen growth, production, and employment, then future trouble is in the cards. Wrong models generate bad results, no matter how good policy intentions may be."

But network correspondents, who are often eager to criticize the actions of Presidents, Senators, Congressmen and (U.S.) Supreme Court Justices, mainly restricted themselves to explaining the perceived consequences of the rate hike, although CBS’s Anthony Mason quoted an economist who agreed with the Fed’s action: "As the water has moved from tepid to warm, nobody’s being burned by this inflation yet. But by the time we are burned, it’s too late."

The closest any of the broadcast networks came back in May to acknowledging Kudlow’s views was in an epilogue to Mason’s story. "You may want to note that some economists disagree about the need for raising interest rates, arguing that it risks hurting a very healthy economy," anchor Dan Rather intoned, gratuitously adding that "the record U.S. economic expansion is now in its 110th month. And in a CBS News/New York Times poll, most Americans — 87 percent — say the Clinton administration deserves some of the credit."

The key dispute is between economists who believe, as a majority of Federal Reserve Governors apparently believe, that the government should restrain economic growth to prevent inflation, and those who want as few restraints as possible on private economic activity. That’s one reason why it’s important to watch President-elect George W. Bush, who’ll have the chance to name three new members to the Fed board when he assumes the presidency next month.

Kudlow now says that "the Federal Reserve made another boneheaded decision by failing to cut the key federal funds rate and end the liquidity deflation that is damaging stock markets and the economy," and he thinks Greenspan should use his authority to cut rates before the next FOMC meeting on January 31.

Last spring, the broadcast networks didn’t do a very good job explaining to viewers the objections that free market experts such as Kudlow had with the assumptions behind the Fed’s interest rate maneuvers. It turned out, however, that Kudlow was right and those who were patting Greenspan on the back were wrong. In the coming year, the networks can provide their viewers with better economic analysis by including economists with free market views in their Rolodex of experts.

— Rich Noyes