photo by Flickr user Alex
Just a few hours after this post hits the World Wide Web, we may finally get the answer to one of this year’s biggest economic questions: When will the Federal Reserve begin raising interest rates?
Then again, we may not. My guess is that we won’t.
The policy-setting Federal Open Market Committee customarily ends its two-day regular meeting at around 2 p.m. Eastern time with a statement announcing any changes to its key short-term interest rate target, which has been pinned near zero since the end of 2008. The statement also includes some verbiage that analysts study the way astrologers examine star charts, looking for hints to the Fed’s future actions.
When 2015 began, the conventional wisdom was that the FOMC would begin lifting rates at its June meeting. But then the U.S. economy nearly stalled in the first quarter of the year, expanding at only a 0.6 percent annual growth rate. So even though there were signs that domestic activity had picked up nicely in the spring, the Fed decided to delay any increase until at least its September meeting. This would allow policymakers to watch what happened overseas, since Greece was on the verge of falling out of the eurozone as summer began, while the Chinese stock market had gone from boom to apparent bust with startling speed.
September has arrived, and with it has come more reason for the Fed to delay. Greece, for the moment, is freshly bailed-out and calm. But China’s woes have spread from its stock market to its real-world economy, where there are abundant signs that things are worse than the Beijing regime cares to admit. A surprise devaluation of the yuan last month sent stock prices reeling around the globe on fears that China’s slowdown would have widespread ripple effects. And oil, which traded above $100 a barrel last year, briefly fell below $40 before recovering slightly of late.
Granted, a U.S. unemployment rate of just 5.1 percent screams for a boost in interest rates, if you believe the decades-old economic models that say a tight labor market will soon translate into higher inflation. The problem is that unemployment has been cut in half since the depth of the recent recession, largely because of people leaving the labor force, with nary a sign of inflation in sight - and quite the opposite where commodity prices are concerned. Most other central banks are trying to loosen, rather than tighten, credit conditions. Raising U.S. interest rates while the rest of the world is doing the opposite would further strengthen the dollar, which could send oil prices back toward $40 and points south, perhaps far south.
For a Fed that has waited seven years to be sure the time is right to raise rates, it probably does not help to think that the right time might have been six months ago, or maybe 12 or 18. The only thing the FOMC really cares about is whether now is also the right time. Judging from the way the panel has acted in the past, it will probably conclude that it is not.
So my guess is that no rate increase will be announced this afternoon. There may be some new language in the Fed statement indicating that it could happen very soon, and that they really, really, really mean it this time. I believe Lucy also meant what she said when she promised Charlie Brown that she would really let him kick that football.
But then she didn’t, because it is just so hard to know when it is time to finally let go.