
The Fed’s imminent interest-rate decision – Is America ready for lift-off? - kevindeasis
http://www.economist.com/news/finance-and-economics/21679806-first-three-pieces-federal-reserves-imminent-interest-rate-decision
======
lkrubner
I am feeling sad about this. The USA economy is clearly weak by any of its own
measures, and there is the likelihood that weakness in Europe and China will
further weaken the USA. Inflation has been subdued for years and has recently
declined further, so there is absolutely no justification for a rate hike.
Labor participation among prime age adults remains lower than before the
recession. And yet the Fed seems absolutely determined to raise rates, even
though there is no conceivable good that can come from this action.

Edit:

Please see:

[http://marginalrevolution.com/marginalrevolution/2015/12/eco...](http://marginalrevolution.com/marginalrevolution/2015/12/economists-
dont-know-what-they-are-talking-about.html)

~~~
fweespeech
> Inflation has been subdued for years and has recently declined further

The reality is the free ride on inflation can't last forever and if the Fed
fails to predict the future it can get pretty grim.

Similarly, there are a number of bubble like portents such as resource prices
that are showing an excess of capital is being malinvested.

Its just one of those situations where you have to hope the professionals
predict the future correctly.

> Labor participation among prime age adults remains lower than before the
> recession.

[https://research.stlouisfed.org/fred2/series/LNS11300060](https://research.stlouisfed.org/fred2/series/LNS11300060)

Its pretty clear the 90s it leveled off and now its dropping. It peaked 15+
years ago. It has nothing to do with the recession but rather, frankly.

I know it seems that way from the media but the fact is it leveled off ~25
years ago and began to drop ~15 years ago. The difference b/t the highest
point and 1990 is very similar to normal noise.

~~~
rjpower9000
>The reality is the free ride on inflation can't last forever and if the Fed
fails to predict the future it can get pretty grim. >Similarly, there are a
number of bubble like portents such as resource prices that are showing an
excess of capital is being malinvested.

The thing is it's really easy for the Fed to slow the economy down, it's a lot
harder to get it started again. So it makes sense for them to wait until they
actually start seeing inflation before they decide to raise rates.

It's hard to say whether the mal-investment is due to the current monetary
policy or the lack of better investment options in a bad economy.

FWIW, the participation rate for the wider population shows a more significant
drop around 2009:

[https://research.stlouisfed.org/fred2/series/CIVPART](https://research.stlouisfed.org/fred2/series/CIVPART)

This might be due to early retirement, or more young people not finding work.
I don't research this data much.

~~~
fweespeech
> It's hard to say whether the mal-investment is due to the current monetary
> policy or the lack of better investment options in a bad economy.

Its probably both, honestly.

------
rquantz
_The Fed is in a jam, though, because it faces asymmetric risks. If it raises
rates too soon, its scope to cut them, should the economy then sour, is
limited by the fact rates cannot fall far below zero. If it waits until
inflation is stronger, it has unlimited capacity to raise rates to tame it._

This to me is the key paragraph. Why not wait until we reach or exceed target
inflation, when they risk tanking our still very fragile economy, and then
being unable to do anything about it since rates would still be close to zero?

~~~
seansmccullough
Because we will have a recession sometime in the next couple years, and if the
Fed keeps interest rates at 0, it will have no ammunition when the time comes.

~~~
TheCowboy
Raising the rates prematurely, you risk accidentally triggering a recession or
weakening the economy, then you're forced to raise rates to prevent a
recession caused from prematurely raising rates.

Interest rates aren't something you can slowly raise without effect.

~~~
seansmccullough
The economy is the strongest it's been in 5 years, and you can't keep rates
low forever.

------
spikels
It will be very interesting how this plays out. We are in rather unexplored
territory. On one hand raising interest rates could spook the stock market
which would reverberate through tech. On the other hand without room to lower
rates the Fed would be without it's best tool when the inevitable next
recession arrives. Seems like _slowly_ raising rates is the best course.

~~~
hibikir
What is interesting about this whole thing is precisely the second point: Are
interest rates really the best tool to alter monetary policy? What's the real
transmission mechanism by which anything the fed does affect the economy.

The view I'd most like tested is Scott Sumner's, who thinks that there's no
such thing as running out of ammunition while trying to provide monetary
stimulus: If a central bank wants to create inflation, all they had to do is
print money and actively spend it, buying bonds, stocks, anything. It's not
what a majority of economists believe, but at the same time, his model is very
predictive. Unconventional monetary policy, like what Japan has been doing,
has changed indicators in Japan in ways that decades of traditional
intervention failed to do.

Either way, there's been so much talk about rate raising, that unless we think
markets are very bad at prediction, I'd be very surprised much changed in the
market if rates moved up a quarter of a point: The uptick has been priced into
the stock prices already. It'd be news if it didn't happen.

~~~
toomuchtodo
I wouldn't say you'd want to throw printed money into any asset class; you're
just going to create a bubble somewhere.

I'd advocate for printing it and dropping it in everyone's checking account.
It creates immediate economic activity by people who are going to go spend
that money today.

~~~
shostack
Isn't that inevitable with any sort of plan to stimulate the economy? Seems
like there will always be _some_ sort of bubble(s), and that it is impossible
to ever reach equilibrium or a smooth state.

~~~
AnimalMuppet
No. The Fed buying stocks and bonds doesn't increase the price of anything
else very much. Not very many people buy cars because the stock market went
up. But if you hand out money to actual people (basic income, maybe?), then
some will pay down debt, and some will buy stuff, and some will do some of
both. But those who buy stuff increase the demand for stuff, which means
people have to make more stuff, which increases the number of jobs, which
means that more people have money to spend, and hopefully the economy improves
on a sustained (non-bubble) basis. (It also cuts down on the amount of bad
debt, which is helpful to the economy as well.)

The Fed buying stocks, on the other hand, does not increase jobs in any
meaningful way. It just raises the prices of stocks. People with money then
want to be in stocks, because the prices are going up. But they aren't buying
stocks because the fundamentals are better; they're buying only because the
price is going up. And their buying pushes the price up further, so more
people see the price going up, so _more_ people buy, and away we go. "Price
going up disconnected from the fundamentals": that's a basic definition of a
bubble. Add in the positive feedback loop of people wanting to buy because the
price is going up, and it's definitely a bubble.

~~~
toomuchtodo
I'm very interested how bad the fallout is going to be on the S&P when the Fed
ticks up interest rates. If today's market activity was any indicator, hold on
tight.

~~~
shostack
Seconding this, but for the Bay Area real estate market. My theory is that
raising rates will reduce the number of people in the market because money
won't be as cheap, however what I'm not sure of is the sheer massive amount of
demand from people with money (investors and highly-paid techies) and whether
it will be enough to cancel it out.

As someone who bought earlier this year I guess I'll see. Sure as heck hope it
keeps going up for a bit more.

------
seansmccullough
Raising rates it a good thing:

1\. It allows the Fed room to maneuver during the next recession
([https://en.wikipedia.org/wiki/Zero_lower_bound](https://en.wikipedia.org/wiki/Zero_lower_bound))

2\. It will all investors to normalize their portfolios
([http://blogs.wsj.com/moneybeat/2015/09/11/what-to-ask-
before...](http://blogs.wsj.com/moneybeat/2015/09/11/what-to-ask-before-you-
reach-for-yield/))

3\. Savings accounts and fixed income will actually yield interest.

The US economy is actually in pretty good shape:

\- Job creation has been solid
([http://www.bls.gov/news.release/pdf/empsit.pdf](http://www.bls.gov/news.release/pdf/empsit.pdf))

\- Unemployment has been declining for 5 years
([https://research.stlouisfed.org/fred2/series/U6RATE](https://research.stlouisfed.org/fred2/series/U6RATE)
<\- U6 rate, includes under-employed and those who quit looking for work)

\- GDP is 20% higher than before the recession
([https://research.stlouisfed.org/fred2/series/GDP](https://research.stlouisfed.org/fred2/series/GDP)
[https://research.stlouisfed.org/fred2/series/A191RL1Q225SBEA](https://research.stlouisfed.org/fred2/series/A191RL1Q225SBEA))

\- Average pay is increasing
([https://research.stlouisfed.org/fred2/series/CES0500000003](https://research.stlouisfed.org/fred2/series/CES0500000003)
all workers,
[https://research.stlouisfed.org/fred2/series/AHETPI](https://research.stlouisfed.org/fred2/series/AHETPI)
not including supervisors)

------
hofmann
What I haven't been able to find out is how an interest rate hike by the Feds
will change consumer borrowing (mortgages, cars, etc.).

If the rate is going from 0% to 0.25% for the Fed loans, does that mean
consumers will not see a rate hike, a rate hike of 0.3%, or multiples of that?

~~~
disgruntledphd2
As the article says, most American mortgages are on fixed rates. You may see
an increase in rates for non-mortgage borrowing.

------
droffel
Rate hikes have been "imminent" since QE1.

------
dragonwriter
> If the Fed has been a bullish coach, the markets have been trusting fans,
> continually believing that an increase is imminent, only to have their
> expectations dashed. At last, however, the moment seems to have arrived. On
> December 16th, when the Fed’s rate-setting committee meets, it seems all but
> certain to raise rates.

That's what the media said _last_ meeting.

~~~
harmegido
For what it's worth, the Fed Funds future markets are priced at a predicting a
~70% chance of a rate hike.

------
pdq
This story has been "The Boy Who Cried Wolf" for more than the past year.
Every 4 weeks they threaten and no change.

I'm hoping they finally move, because rates have been too low too long. Yes I
realize this is likely the worst time to raise rates in the past 5 years, but
that's only because they waited too long.

~~~
ergothus
"too low too long"

Is there something inherently wrong with being low for a lengthy period of
time? "Too low" is obviously bad (if true - my understanding differs, but I'm
no expert), but is there any concern over "too long" if "too low" isn't true?
(honest question - is a too stable rate itself a problem?)

On to the "too low" part - My understanding is that Fed targets 2% inflation,
and we've just not been there. Do you have reasons other than gut instinct to
dislike the low rate? (Again, honest question, my understanding could very
well be wrong).

~~~
rquantz
In fact, the problem has been that rates aren't low enough, they are united by
the zero lower bound. The natural interest rate would be several points in the
negative.

~~~
pdq
In what universe could interest rates ever be negative and considered
"natural"? Or even a zero interest rate being considered "natural".

If you believe that to be true, what rational entity would take the risk of
loaning out money to either lose money or get back solely their principal at
some future time?

And considering prices are inflating, this makes zero and negative interest
rates even worse. Market interest rates reward the savers by risking their
capital and loaning it to borrowers who can put that capital to work and pay
back the lender both principal and interest.

~~~
rquantz
Sorry, autocorrect. That was supposed to be _limited_ by the zero lower bound.
You can't get below zero (or not much below anyway).

------
carsongross
Reminder, someone at the Fed thought _negative_ rates in 2015 and 2016 were
appropriate:

[https://marketrealist.imgix.net/uploads/2015/09/Sep-dot-
plot...](https://marketrealist.imgix.net/uploads/2015/09/Sep-dot-plot.1.jpg)

I'm not saying it was Yellen... But it was Yellen. If they were looking to
shock-and-awe this market, talking hike and then going negative would do it.

I have no idea what is going to happen.

~~~
zerstroyer
Well negative interest rates could be appropriate for negative economic
growth. So if we never allow for negative interest rates we never allow for
negative economic growth. But if we ever want to achieve singularity, we have
to allow our economy to shrink to (zero).

