The Federal Reserve Bank (Fed) hiked key interest rates by 0.5% on May 16 to halt what it called "inflationary imbalances." Inflation is usually measured as the percentage increase of prices for consumer items such as energy, food, and housing (called the Consumer Price Index). Yet the CPI remained virtually unchanged during April.

However, the Fed's action has changed the lives of many U.S. workers and their families. For May, there were 116,000 private-sector layoffs, an eight-year high, according to the Labor Department. On this news, the Nasdaq rose 230 points to cap a one-week jump of more than 600 points, an all-time best for percentage growth.

With capitalistic vision, the June 2 Financial Times editorialized: "Rarely has so much joy been shown at a rise in unemployment as it was Friday in the U.S." The next day, Louis Uchitelle reported in the New York Times that May's job cuts are "the strongest signal yet that the booming American economy is finally slowing," with the jobless rate for blacks and Hispanics growing the most at 0.8 and 0.4 percent, respectively.

The conventional wisdom generally accepts the Fed's line that increasing joblessness is the way to fight inflation (our economy's worst enemy). But is the current triumph of Fed policy the complete story?

Consider the role of debt in the American economy. For the vast majority of Americans--hourly workers and small-business people--the Fed's policy is hurtful, due to their growing reliance on credit to make ends meet. Between December 1994 and December 1999, consumer credit rose $437 billion, an increase of 45 percent.

Borrowed money is also sustaining the U.S. trade deficit, the gap between imports bought and exports sold. In March 2000, our trade deficit soared to a record $30.2 billion. Though workers' wages and benefits climbed 1.4 percent during January through March (almost an 11-year high), the U.S. trade deficit is growing by about $1 billion a day.

Meanwhile, buying on credit and going into debt has lowered our rate of personal savings, down 74 percent since 1997. In a related development, U.S. banks now have the lowest levels ever of required reserves (credit balances with the Fed and vault cash for emergencies) as a percentage of deposits, writes Andrew Caughey.

He continues: "Required reserves on savings accounts were eliminated in 1990, at a time when banks were weakened by losses in the commercial real estate market. Sweep accounts (moving customers' deposits into checking accounts not subject to reserve requirements) for retail or non-business accounts began to spread in 1994. These two developments have reduced required reserves to their lowest level in history."

Significantly, reducing required reserves has increased banks' expansion of credit. Caughey asks, "If debt-money creation underlies the current economic boom, what will sustain it in the future?" (The Pulse of Capitalism, April 2000). The Fed knows that the answer to his question will affect creditors and debtors here and around the world.

For now, the Fed's raising of interest rates may calm lenders who are nervous about Americans' soaring indebtedness. One example is the growing U.S. trade deficit being financed by Japanese lenders. They are now earning a higher rate of profit for the risk of lending to indebted Americans.

However, increasing the cost of borrowing money cuts two ways. Fed policy of interest rate increases runs the risk of drying up the demand for credit. Could this be a fate worse than debt?

On one hand, Americans' use of credit has resulted in our being the biggest private debtor in the world. On the other, this trend also means that American and foreign firms and workers are vulnerable to the Fed's hikes in the cost of borrowed money.

If workers buy less on loaned money, firms would sell less. With falling sales, firms would be forced by market competition to cut costs. Meanwhile, firms that have gone into debt to finance expansion (as many high-tech and dot-com companies have) will have to pay out more in interest to cover their debts.

Under Fed policy to make borrowed money more expensive, some firms would be forced to survive by worker layoffs. What Marx called "the reserve army of the unemployed" would grow. And this "army" has grown, with the official U.S. jobless rate rising to 4.1% in May versus 3.9% in April.

As market competition drives some firms to the wall, workers who stay employed could be forced to accept lower wages and worse working conditions. This would in part cut workers' income to buy goods and services. In turn, their weakened purchasing power would slow business investment.

Mr. Dow and Mr. Jones could also take a hit if the Fed continues to raise the cost of borrowed money.

"A rapid rise in interest rates threatens to collapse the stock market bubble, leading to an outflow of capital which has increasingly found its way on to Wall Street," notes Nick Beam (wsws.org, 5-25-00). Capital flight, of course, was a key factor in the East Asian financial crisis three years ago.

Back to Wall Street now, Fed interest-rate increases could pinch the profits being returned to stock market investors who, in turn, buy luxury items. This is the stock market's so-called "wealth effect," and its slowing down would also slow business investment.

To be sure, the world is watching to see if Fed policy will keep our "booming economy" on track. Given the Fed's six interest-rate increases during the past year, can debt-driven spending and speculating continue to keep employment and investment chugging along? Or, is the April 14 loss of $2 trillion in shareholder wealth a sign of more financial turbulence to come? Perhaps this is the calm before the storm of global capitalism. Time will tell.