To raise or not to raise, that’s the dilemma that the Federal Reserve thrust upon the financial markets last week.
Maybe you are more into omelets than Hamlets, so let me put it another way. When it came to rate hikes, Wall Street had all its eggs in one basket: that the earliest possible rate hike would not happen until 2017.
Then last Wednesday happened.
On May 18, the Fed hinted strongly that only the second rate hike of the eight-year Obama Administration will come on June 15.
What the … ?
Even I, the most virulent prognosticator of a June hike, had recently backed off that prediction.
The moral: This above all, to thine own self be true.
But I’ve probably already plagiarized from Shakespeare more than he ever stole from others, so let me give you some new thoughts in the form of a list of con and pros of raising interest rates.
Yes, I said “con” — singular.
There is only one reason not to raise rates, but it is a big one. By increasing borrowing costs, the Fed could tip an already tipsy US economy into a recession that might drag the rest of the world with it.
I’ve said this before. Under normal circumstances, no central bank would even be considering an increase in borrowing costs at a time when the economy is dragging its butt like I do as I complete the 18th hole on a 30-over-par round of golf.
Right now, the economy might be growing by an anemic, but not horrible, 2.5 percent annual rate. But that follows a pathetic expansion of 1.4 percent in the fourth quarter of 2015 and nearly invisible growth of just 0.5 percent in 2016’s first quarter.
Worse, there are signs in the industrial portion of our economy that we are already in a recession. So GDP growth could soon be revised lower.
Quoting my friend, the economist Walter John Williams: “Production contracted year-to-year in first-quarter 2016 for the second consecutive quarter. Since the creation of the Federal Reserve’s index of Industrial Production in 1919, that never has happened outside of a formal recession.”
Fed officials have to know the trouble the economy is in — it’s their index. And despite lamebrain comments from Fed officials looking for an excuse to raise rates, there really is none in the economic data.
So why even consider raising interest rates? And why make that intention so clear in the May 18 notes of the April meeting — as well as in the comments of numerous Fed officials? Because it is more dangerous not to raise rates than to raise them.
Here are the pros — the reasons for raising rates:
- The economy has been wilting since the 2007 Great Recession, but there have been a number of brief periods during which rates could have been raised. Except for last December, the Fed balked each time — probably because it fear a negative reaction of the stock market.
That 2.5 percent growth that seems to be occurring in the second quarter — even if it eventually proves to have been an illusion — is another one of those opportunities that can’t be missed.
- Another reason: Right now, the Fed is completely out of ammunition. Fed Chair Janet Yellen might argue otherwise, but with interest rates near zero, the Fed cannot go any lower when — not if — the economy falters.
But it would be very powerful if the Fed raised rates now and then needed to reverse course by cutting them again. A surprise reversal might embarrass the Fed, but it would also shock some life into the financial markets and maybe even the economy.
- There’s an election coming up and the Fed isn’t going to want to look political.
Don’t get me wrong. The Fed already looks tilted very much to the Democrats’ cause. And the fact that President Obama recently had his first meeting in four years with Yellen and that Donald Trump is threatening to do bad things to the Fed makes the central bank’s loyalty very clear.
But the Fed won’t want to look biased. So it needs to raise rates sooner rather than later — and that’s why June is a good option. If it balks then, the Fed might have to raise rates in the early months of, say, a Trump presidency. And then it will really be under attack.
- Another thing working in favor of a June rate hike is the fact that there’s a crucial employment report set to be released on June 3, just a week and a half before the Fed will make its rate decision.
As I’ve been telling you for some time, there are flaky adjustments to the spring employment numbers.
The April figures that came out in May also greatly helped boost the monthly totals — it’s just that April was so bad even a boost couldn’t help them look anything but lousy.
But the May figures could be different. Job growth has a chance of being strong and the Fed could have its best excuse yet for a rate hike.
- The unemployment rate, at 5.0 percent, is solid enough.
I know, I know, the statistic is nonsense. For starters, it doesn’t count people who’ve given up looking for work. Plus, it’s easy for people to claim to surveyors that they have a job.
There are many other reasons not to believe the unemployment rate — like the fact that the decline in unemployment over the past few years simply isn’t borne out by the amount of economic growth or by the number of people in the workforce today compared with the overall adult population.
Still, Fed officials could put their nitwit hats on and say that the economy has reached full employment. It won’t be true — and they will know it — but if you are looking for reasons to raise rates in June, that’s as good as any.