Fed Should Not Raise Rates for at Least a Year

Janet YellenOver at Fed Watch, Tim Duy made, The Case For September. The issue at hand is whether the Federal Reserve will start raising interest rates in September. As Duy pointed out, there really isn’t much of a reason to do this. But sadly, the Fed knows from long experience, that it doesn’t get blamed for low employment levels, but it does get blamed for even the slightest hint of inflation. It’s a very bad situation where the Fed does not get the proper incentives. Nominally, the Fed is supposed to care as much about employment as it does price stability. In fact, employment takes a distinct backseat to inflation. When inflation is absolutely, positively not a problem, the Fed does what it can about employment. Of course, normally when inflation is not at all a risk, there is very little that the Fed can do for employment. Funny that.

Anyway, Duy pointed out that the big issue here is not that raising interest rates will cause the economy to go back into recession. Rather, it might “lock the economy into a sub-par equilibrium.” I’m not sure that any of these people care about that. That’s another part of the screwed up incentives at the Fed. The people there represent the power elite. Almost half of them are directly appointed by the big banks. They define the common good as being what is good for themselves and their class.

But I would prefer that the Federal Reserve raise interest rates in September. At least if they screw up and do throw the economy into a tailspin, there will be time to fix their mess before the 2016 election. I would rather that the Fed decide that if it doesn’t raise interest rates by the end of this year, that it won’t do it for the first three quarters of 2016. Because we know that if the Fed tanks the economy next year, it will result in President Bush or President Walker or even President Trump.

Since at least 1976, the performance of the US economy for the first nine months of the presidential election year has been the single biggest factor in determining who becomes president. It’s depressing. It doesn’t matter what the cause is. For example, the economic collapse of 2008 was not Bush’s fault, but the fact that he was in power when it happened meant that John McCain had basically no chance of becoming president. Or it worked to liberals’ benefit in that case. But I would hate for the Supreme Court to become overloaded with extremists on the right just because Janet Yellen doesn’t have quite as good a grip on the economy as she thinks she does.

Of course, it is almost inconceivable that the economy will grow enough over the next year that inflation actually becomes a problem. Currently, the employment to population ratio for prime age workers (age 25-54) is 3.2 percentage points below its pre-crisis level. It is 4.8 percentage points below it’s Clinton level peak when the inflation rate was roughly 3%. It is even 3.2 percentage points below its’ Reagan-era peak when the inflation rate was 5%, and people thought that was fine. The the economy is actually still really depressed regardless of what the U-3 rate says.

But the truth is that there aren’t a bunch of unemployed people talking to Yellen and her minions. They are only talking to really rich people who are not happy that bonds aren’t paying as much as they want. And so there is constant pressure on the Fed to raise interest rates, even though clearly, the right thing to do is to wait until after the next election. And maybe that will happen. We’ll see. But Yellen seems to have been itching to raise interest rates for the past year. And the urge only gets stronger.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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