Commentator Robert Reich
Commentator Robert Reich - 
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TESS VIGELAND: Will they or won't they? That is the question when it comes to whether or not the Federal Reserve will raise interest rates yet again. The Fed meets next week and is expected to hike the benchmark federal funds rate for the 17th time in a row. Mostly on inflation worries. Marketplace commentator and former labor secretary Robert Reich says there is something to fret over, but it is not inflation.

ROBERT REICH: Ben Bernanke and his Federal Reserve remember the double-digit inflation of the 1970s and are determined to mount a preemptive strike.

They don't have a direct memory of the trauma that haunted the previous generation, the depression of the 1930s. Each generation, in its determination to avoid the nightmare it does remember, runs the danger of overreacting.

A generation ago, they paid too little attention to inflationary forces, so Paul Volcker who was then Fed chairman, had to break the back of inflation and thereby put the economy into a severe recession.

Now Bernanke and company are paying too little attention to deflationary forces building in America and the global economy.

Today's economy is not at all like the overheated economy of the 1970s. Labor unions don't have nearly the power they did then to get wage increases. Big companies don't have nearly the power they did then to raise prices. What's more, productivity has been soaring over the last five years while the median wage has been stuck in the mud. Wages, remember, constitute about 70 percent of the cost of doing business.

So how can price pressures be building?

The price increases we're now witnessing are not due to excess demand and limited productive capacity, which cause inflation. They come from soaring energy and raw materials costs, which are based on expectations of future price increases. In other words, there's a lot of speculation going on in global commodity markets, and such bubbles can burst any time. Meanwhile, the global market is glutted with productive capacity, not only in America. Look at China.

If anything, there's too much capacity relative to demand, which is a recipe for deflation. Prices can begin to drop because buyers hold off, expecting further price decreases. It happened in Japan in the 1990s. It's already starting to happen in certain housing markets in the United States that had been red-hot but are now cooling so fast home prices are dropping. Deflation is often accompanied by stagnant or falling wages, which make it harder for consumers to afford to buy. Look what's been happening to American wages.

The Fed and other central bankers around the world are raising interest rates because they're fighting the last war. But they already won that war. Inflation is no longer our biggest threat. They ought to be worrying about the war before the last one, and the specter of deflation.

They're in danger of losing that war even before they know they're in it.

TESS VIGELAND: Robert Reich teaches public policy at the University of California at Berkeley. And I'm Tess Vigeland, thanks for being with us.