Editorial: Fed should resume raising interest rates
At its regular meeting today and tomorrow, the Federal Reserve will decide whether it’s finally time to begin increasing interest rates. We think the fed should opt for a series of small and steady hikes that will begin returning rates to a more normal level.
It’s not an easy decision. Interest rates have been at or near zero for seven years, with only a small hike last December. That first increase was expected to trigger additional quarterly hikes, but the Fed has not followed up, waiting instead to be sure the economy is on solid ground.
This would seem the right time to resume the hikes, although there are compelling arguments against doing so.
Unemployment is below 5 percent, which would typically signal a rate hike is in order. But participation in the workforce is at historic lows; more growth is needed to lure back those who are sitting on the sidelines. The Fed would have to be sure that a small rate hike would not slow hiring.
At a 2 percent average annual growth rate, there’s not much room for error. Rate hikes could discourage investment or send the stock market tumbling. But while the economy has not delivered the hoped for gains since the 2008 recession, growth has been consistently, if slowly, upward.
The risks of raising rates are outweighed by the prudency of doing so in an orderly, scheduled fashion.
Maintaining such low rates for so long discourages savings, and encourages speculation that could lead to bubbles and busts, particularly in the commercial real estate and stock markets. The risks increase the longer rates remain low.
Low interest rates also have the potential to exasperate income inequality. Those on fixed incomes and who depend on savings, particularly senior citizens, are harmed by the low rates, while those who deal in real estate and equities benefit.
Corporate earnings have been reasonably strong. Natural buyers in the stock market should be able to counter speculators and keep the market moving upward despite interest rate hikes.
While inflation is not a serious threat, it remains a possibility. The Fed does not need a rate hike to slow the economy, but it does need to keep the risk of overheating in check.
Household incomes are improving and there is less turnover in the job market. Oil and gas prices, which had been a drag on economic growth, are on the rebound. Prices in almost every sector are rising.
Getting out ahead of a spike in inflation would be smart.
Another reason to raise rates is to give the Fed a tool in case a recession hits. With the target federal funds rate at .25 to .50 percent, there’s not much room for the Fed to stimulate the economy with a rate cut. Gradually bringing the rate up will make the Fed more nimble to address a slowdown.
Of course, while the Federal Reserve is supposed to be aloof from politics, Chairman Janet Yellen may decide that raising rates ahead of an extremely acrimonious election may involve the Fed inadvertently in the campaign season, and decide to put off a decision until December.
If that’s the case, she should at least signal that the next meeting likely will bring a resumption of interest rate hikes.