Must-Read: Noah Smith: Three Reasons the Fed Can Wait to Raise Rates
Must-Read: Noah Smith makes an extremely cogent case that any increases in interest rates by the Federal Reserve this September for this December or, indeed, next March are almost surely premature and inappropriate. So why is the Federal Reserve on track to do so? I think there are three reasons. First, Fed chair Janet Yellen thinks that a productivity growth slowdown is right now putting upward pressure on the natural rate of unemployment; second, too many of the regional bank presidents on the FOMC listen too much to commercial bankers who believe–wrongly, I think–that their businesses will be healthier in five years if the Fed treats its 2%/year inflation target as a ceiling rather than an average and raises rates whenever it has any excuse to do so; and, third, Fed Chair Janet Yellen may be less willing than she should to split the FOMC consensus and go her way with the support of the president-appointed and senate-confirmed governors, for whom Larry Meyer’s rule is “you vote with the Chair”:
Three Reasons the Fed Can Wait to Raise Rates: “The U.S. economy is perceived [by the Fed] to be in recovery…
:…this seems to be a very odd time to raise rates and there are at least three reasons for this: Inflation is very low… has been consistently below [the 2%] target for more than a year and a half…. China is crashing. Although the Chinese government insists that its economy is still expanding at a nice 7 percent clip, most people believe that growth… is spluttering…. The stock market just crashed, the real estate market is tumbling and government actions… look panicky…. U.S. labor markets have still not recovered fully from the Great Recession…. There have been some encouraging signs recently that these so-called discouraged workers are starting to return to the job market…. So there are big reasons for the Fed to delay increasing rates. Why, then, does it seem to be sticking with the September liftoff schedule?… Today, the U.S. finds itself in a strikingly similar situation to Japan in 2000–interest rates at zero, inflation below target, employment still soft and a major trading partner experiencing a crash. U.S policy makers shouldn’t be so focused on fear of zero interest rates that they end up tanking the economy. The Fed should exercise caution.