All the maybe-we-will and maybe-we-won’t comments from the Fed about raising interest rates later this month is getting tiresome. Not that they’ll listen. But if you have a direct line to the Fed — maybe you’re the head of a bank or a Fed governor’s pool service guy — please pass along the following four reasons why it’s better to raise rates now than later as well as one reason the Fed should probably wait.
1. You're Not Surprising Anyone
You’ve talked about when it’s coming, why it’s coming, and how much is coming for so long and in such detail that the actual 0.25 percentage point hike in the federal funds rate could turn out to be the biggest yawner since Y2K. Take it from a long-time New York City subway rider. When the conductor keeps announcing, “Next stop, Times Square,” and the train pulls into the station, nobody is shocked when the doors open and it’s Times Square. You didn’t want to shock the markets with your actions, so you’ve talked about this for ages. All your prep work is done, the markets are virtually shock-proof, at least as far as rate rises are concerned, so just do it!
2. The Hike is Tiny
For crying out loud, what are we talking about here — a crummy ¼ of a percentage point increase in the rate banks charge each other to meet reserve requirements? How much of an effect can that have on interest rates higher up the food chain? Just do it!
3. Rates Will Still Be Ridiculously Low
This is part two of point two. Even though you’re doubling (oh my goodness!) interest rates, we’re only going from a rate of one-quarter of one percent to one-half of one percent. My first mortgage was at 14%. Let’s have a sense of proportion. Rates are still insanely low and, here’s a shocker, maybe they’re low less because of anything the Fed is doing and more because there is very little demand for money.
4. You Need the Ammo
Even if it’s not much, raising the fed funds rate to 0.5% means you could always cut it back to 0.25% if you wanted to give the economy a shot of adrenaline. A rate rise now is like packing a sandwich in case we need it later.
5. Why You'll Probably Hold Off: The Stock Market
Call it the Smoot-Hawley syndrome. Just as everyone associated with the Depression-era tax hike has been viewed a fool, no Fed chairman wants to be remembered for raising interest rates when the stock market was collapsing. While a rate hike of the miniscule magnitude that’s planned is unlikely to have any negative effect on the real economy, it would be a psychological blow to a panicky financial sector and to investors. So while the Fed should raise rates sooner rather than later, expect them to wait if September’s markets keep slipping.
Image courtesy of ddpavumba at FreeDigitalPhotos.net