• By
  • Sara Murray

Mitt Romney, trying to offer a simplified lesson in economics in South Carolina, seemed to bungle his message.


Republican Presidential candidate Mitt Romney




It wasn’t like the fiery anti-Fed rhetoric of Ron Paul or attacks on Chairman Ben Bernanke that have come from Rick Perry and Newt Gingrich. But it did suggest a link between ratings on government debt and the Fed, which doesn’t exist. In fact Mr. Romney was explaining two interest-rate issues that aren’t directly related.

In some cases, the Fed can raise rates, sending the economy into recession. That happened in the 1980s when Paul Volcker, then the Fed chairman, boosted rates to try to tamp down inflation. A recession followed. But it’s not accurate that “usually,” raising interest rates pushes the economy into recession. For example, sometimes raising interest rates is a way of normalizing policy. When the Fed starts raising rates from their current near-zero level, the goal won’t be to cause a recession.

Meanwhile, the Fed’s interest-rate setting is something that’s not directly related to the rate shock that countries can face when their debt is downgraded. The Fed sets the rates that banks charge one another on short-term loans. Those are different from the rates that governments pay on their debt. Higher rates on government borrowing come from lenders losing confidence in a country’s ability to pay its obligations.