Home >> Daily Dose >> Economic Conditions Will be Determining Factor for Interest Rate Increase
Print This Post Print This Post

Economic Conditions Will be Determining Factor for Interest Rate Increase

rates-riseThe Bureau of Labor Statistics’ October jobs report released last week far exceeded expectations, generating widespread speculation that the Federal Reserve will raise short-term rates in the Federal Open Market Committee’s final meeting of the year in December.

San Francisco Fed President and CEO John C. Williams stated in an address Friday that in the past, data that drives economic decisions clearly supported a “patient” approach when it comes to raising rates. That same data, he said, will ultimately determine when the Fed decides to raise rates this time around.

Speaking to the Arizona Council on Economic Education in Tempe, Arizona, on Saturday, Williams presented arguments for both sides, and concluded that the data will determine when the rates are raised.

On the side of the argument for exercising patience, Williams said there are two main concerns: One, the constraint of the “zero lower bound,” which is to say rates can’t go any lower than zero and there will not be room to lower the rates if there is another economic downturn or if inflation drops further; and two, the inflation has been “stubbornly” below the Fed’s target rate of 2 percent for almost three and a half years.

“And while we can ultimately control our own inflationary destiny, as it were, there’s no question that globally low inflation, and the policies other countries have adopted to combat it, has contributed to downward pressure in the U.S.,” Williams said. “As I said, I see inflation bouncing back. But forecasts aren’t guarantees, and there is always the risk that it could take longer than I expect.”

On the other side of the issue—raising rates sooner than later—Williams presented a few arguments in favor. One, the economy is a moving target—according to research, it takes a year or two for monetary policy to take full effect, so the decisions the Fed makes have to be based on where the economy is going and not where it is at present; two, raising rates “would also allow a smoother, more gradual process of policy normalization, giving us space to fine-tune our responses to any surprise changes in economic conditions”; and finally, an economy that runs too hot for too long can result in imbalances that lead to either excessive inflation (as was the case in the 1960s and 1970s) or economic correction and recession (such as in the burst of the “dot com” bubble in the early 2000s or the housing market in 2008).

“And in the first half of the 2000s, the economy was propelled by irrational exuberance over housing, sending house prices spiraling far beyond fundamentals and leading to massive overbuilding,” Williams said. “If we wait too long to remove monetary accommodation, we hazard allowing these imbalances to grow, at great cost to our economy.”

While Williams stated that his economic views are data-driven and that the arguments in the past for patience far outweighed the “raise rates more sooner than later” approach, he also stated that his forecast is “[W]e’ll reach our maximum employment mandate in the near future and I’m increasingly confident that inflation will gradually move back to our 2 percent goal. . . Given the progress we continue to make on our goals, I view the next appropriate step as the start of a process of gradually raising interest rates. That’s the ‘how’; as I said, the data will determine the ‘when.’”

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.

Check Also

Survey: Homeownership Remains Elusive for Baby Boomer Renters

A recent look into housing affordability by NeighborWorks America has found that three in five long-term baby boomer renters feel homeownership remains unattainable.