Should the Federal Reserve raise interest rates?

The next meeting is in December. Signs show that the unemployment rate is around 5% and there have been reports that wages are growing. Also, worries about economic fallout from China seem to have subsided.

A lot of people that want interest rate increases are worried about inflation running away if we keep rates around 0% for much longer, but it seems like these people have been saying that for quite a while.

From what I can tell, people who don't want to raise the rates are still uncertain that our economy is as healthy as some of the new numbers suggest.

So that's the best I can do at providing some context. What do you think will happen at the next meeting? What should happen? Maybe none of this matters! That seems like an ok opinion too

I think the debate is framed all wrong and makes it sound as though interest rates are the gasoline that powers the economy. I think there's only so much monetary policy can do, and I think that it will be painful whenever we raise rates, but there's never going to be a good time so might as well just get it over with.

Some places do make it seem like interest rates are the only politically feasible way to juice the economy.

They may be, in the sense that the climate has been terrible for fiscal stimulus in the form of public works projects etc. That said, I just think the amount of "juice" they can really provide is limited, plus has all kinds of weird unintended consequences when it keeps going. I'm definitely interested/nervous to see what happens to the VC-fueled silicon valley boom when rates start to go up, what happens to the housing market, etc. And who knows what kinds of fun derivative products we'll discover too late.

The greatest difficulty with the current near-zero interest rate is that it fuels speculation and guarantees a significant misallocation of capital, which will in turn guarantee yet another recession when those chickens come home to roost. The second greatest difficulty is that raising rates now will signal the speculators that the chickens are indeed arriving, which will cause a scramble to unwind positions that are untenable without the current give-away rates. Which, of course, is why the Fed intends to raise rates at the most timid possible pace.

This whole increasingly unstable mess sucks and the big brains do not know how to stabilize it.

leave rates alone and keep printing $ til my retirement is large enough to invest in bonds for a serviceable income, imo

inflation has been below target for a long time, it makes no sense to raise rates now

Ideally, the past 8 years should have been one huge infrastructure makeover, worldwide, based on public works and tax breaks for specifically beneficial private projects. When rates are almost zero, that's the smart path. What a wasted opportunity.

man alive and aimless otm

I cannot even pretend to be an expert in this nonsense but virtually no one trustworthy seems to think that raising rates at this point is a good idea.

No one thinks it's a "good idea" because it's not a "good idea." The problem is there is no "good idea" right now, at least I guess not one that is politically feasible. But my guess is that few people want to stick their neck out and say "now, rather than later, is the time to take our beating." Everyone will just blame those people for the inevitable beating. Whereas I guess at least if you have the cover of "we've hit our target unemployment rate," you can say "oops!" when things go sour. I do hope I'm wrong, and sometimes I think "jeez, if it's me and 'Tyler Durden' making this argument, maybe I'm on the wrong side of things."

But the way we have been using monetary policy since 2008 does not really jibe with my understanding of how Keynesian monetary policy is supposed to work, i.e. smooth out the bumps, get people/businesses spending again when they irrationally overreact and tighten up. The fed is supposed to jumpstart the engine, not drive alongside the economy with a siphon suspended between the two gas tanks.

Trustworthy people seem to be thinking that the "target unemployment rate" is masking underemployment and with no risk of inflation there is no reason to raise them.

Agree none of this is what we should have been doing btw but obviously getting governments to buy heavily into the other piece of Keynes (the parts Aimless mentioned) didn't happen.

Well unemployment does "undercount" the unemployed but it's an open secret that hasn't changed in a long time that that's the case. So there's no better argument against trusting the number now than there was ten years ago. And by the same token, our measures of inflation can be said to under measure inflation.

the good news is that the US hasn't embraced austerity to the extent that many European countries have, the bad news is that we still failed to borrow and spend nearly as much as we should have

Two of the biggest chunks of US consumers' necessary spending, housing and healthcare, have gone up much faster than "inflation" since the recovery began. I think the first of those two is likely attributable to low rates. The second IDK, not really sure what the connection would be but doesn't seem impossible.

Low rates also fuel VC speculation, which in turn fuels companies like Uber and AirBnB, which can easily undercut and harm existing, job-providing industries while not having to show profit thanks to being awash in cheap VC dollars. I don't have the economic chops/resources to say what the net effect of that is, and how the cost-benefit works out.

But I don't think it can be said that there are no negative effects of low rates.

I also tend to think that bubbles, generally, siphon money from ordinary people to the top, because it's the people at the top who know how to benefit and how to get out before things burst.

There's definitely excess capacity in the labor market that isn't counted by the unemployment rate. I gather that this is partly why it's taking so long for average people to realize any wage gains. Raising the interest rates might dampen the prospects of additional job growth and more wage gain.

I'm sympathetic to those that want to raise rates just to get it over with, but it also seems like there's some good that can still be done by keeping them low. And if we were to slip into a recession after raising them we might be left without any politically feasible options for trying to right the ship again.

x-post

re: VC speculation, I'm not sure if this is what you're talking about, but that company Square, Inc. that makes those little white squares you can use to swipe credit cards on cell phones, reportedly dropped in value by like 30% or something

I would guess Square got hit hard by everyone horning in on their territory more than anything else. Everyone from Paypal to major banks offers a swiper that works on your phone or tablet.

While they were being radically disruptive they neglected to factor anything in that would guarantee they remained the major player in that world.

There seems to be a pattern of tech startups doing IPOs and then falling through the floor, almost as though the IPO is a way for everyone to cash out before the company falls apart. Groupon, Twitter, Zulilly, Grubhub, Angie's List, Pandora, all substantially down from their IPOs, and I'll bet I could come up with a lot more. Although Facebook has done well, and so has Priceline. Also it may just be the nature of the tech biz, to an extent. I think Buffet has a thing about not investing in relatively new tech companies because it's so easy for them to be upended by other companies or changing trends.

I see

Etsy is another one -- down 70% in the 6 months since its IPO.

Of course the tech IPO scam (IMO it's a scam) is another example of the ruling classes using bubbles to siphon money off everyone else, and it probably is fueled by low rates as well.

Another thing low rates are apparently causing:

http://www.marketplace.org/2015/11/10/economy/corporations-cashing-cheap-debt-while-they-can

Again, really don't feel qualified to opine on the net effect of all of these things, the cost-benefit or whatever.

"Of course the tech IPO scam (IMO it's a scam) is another example of the ruling classes using bubbles to siphon money off everyone else, and it probably is fueled by low rates as well."

Uh there were tons of tech IPOs failures in the late 90s and rates were historically pretty high then so I'm not sure there is a rate connection here.

This seems like a done deal for Dec 15, except everyone is still a little wary of inflation being so low (less than 1% when the target is 2%). I'm no economist but I thought the low inflation would be an obvious result of average workers realizing almost none of the gains from the recovery combined with so many people dropping out of the workforce all together

part of me is like, they shouldn't raise for all the good usual reason. but then otoh, it's just 25 basis points ffs just raise that shit already and stop arguing about it every month

between the low-interest-rates-are-sewing-the-seeds-of-the-next-bubble and raising-interest-rates-will-stifle-an-already-slow-recovery perspectives i think 25 basis points is a fair enough middle ground

My fear is kind of that bubble/recovery are two sides of the same coin. Oh well, fuck it, pull the lever.

it's hilarious how interesting monetary policy got in the past 6 years

yeah, I mean hopefully the economy isn't so fragile that raising it 25 points will send it into tailspin

any comment on the Great Inflation Speculation? we all know oil is down but that can't be the whole story can it?

no one seems to really talk about inflation anymore, finally. seems more just people being creeped out by ZIRP

http://www.vox.com/business-and-finance/2015/12/15/10112294/fed-rate-hike

ugh i'm finally going to have to read a vox article

Matt Yglesias has no special qualifications to be commenting on monetary policy, let alone in a condescending "explainer" style.

who is qualified to comment on monetary policy?

So what, raise rates because you don't like the tone of an article?

Xpost

idk he's been an economics blogger for a decade and is given credibility by krugman etc

lots of people w/ the 'special qualifications' on economics have arguments/opinions that are total nonsense

See Fed Governors, for example...

That article just repeats an argument that has been made ad infinitum.

lol best comment in the IGM economists survey he cites:

Kenneth Judd Stanford Uncertain 8
The Fed spends many 10^7 dollars annually on econ research. In mid-2008, the Fed did not think that a crisis was at hand. With my budget...

well there are only so many arguments to make, and he has to fish for some pageviews

iatee otm. yglesias is a v good armchair economist

That article just repeats an argument that has been made ad infinitum.

― on entre O.K. on sort K.O. (man alive), Tuesday, December 15, 2015 12:35 PM (10 seconds ago) Bookmark Flag Post Permalink

well, he even says in the article that he's bored of making the same argument. just cause you have to argue something over and over doesn't make it false

i never really got the hate for vox. i understand why it bruises people who think of themselves as smart's egos to have things explained to them in a kindergarten teacher's tone, but i appreciate it for that. more stuff should be directed at baby dum-dum level readers and assume no prior knowledge of topic imo. real heads can read anything else

It's been the correct argument for years and nothing in overall economic conditions has changed to suddenly make it incorrect.

"Thanks to the global collapse in oil prices, there has been literally no inflation at all throughout 2015."

I thought this explanation was too easy to be the whole story, but I guess my inflation theory from above has been debunked in one sentence.

re the IGM panel: i think Acemoglu's comment (below market interest rates for a long time cause capital misallocation which has to be weighed against Keynesian factors) is the best one, as well as Thaler "it's just 25bp so it doesn't matter"

yeah vox is pretty middlebrow and there is nothing ilx hates more than middlebrow stuff

but it's a totally fine/innocuous site and I'm gonna read whatever ezra klein writes wherever he writes it

depressing how many "top economists" had garbage reasons though, like the "one point in a noisy time series (unemployment) was low which suggests that another thing we sort of believe is related to it but the fit isn't that tight (inflation) is going to increase above target even though it has been below target for 4 years"

when i was in grad school the head of our central bank gave a talk at our dept and i realized that raising interest rates has kind of a certain macho allure among macroeconomists. they all wanna be volcker

right that's the "very serious people" meme or whatever

it's too bad we didn't do more infrastructure investment while rates were so low

haha yeah even the hawk vs dove terminology fits that

he actually ended up cutting rates

I'm an unemployment hawk and an inflation dove

it's too bad we didn't do more infrastructure investment while rates were so low

exactly! we are lucky in the US that we've been able to keep rates low for so long, unlike so many European countries that unnecessarily took extreme austerity measures, but we certainly did not capitalize on them nearly as much as we could have. And now it may be too late...

xps

My understanding is that US real wage growth has been stagnant for more than two decades and whatever economic growth based in consumer spending the US has experienced during that time was mainly driven by increases in consumer debt. With so many manufacturing jobs having moved overseas we're going to have excess capacity in the labor market for the foreseeable future, regardless of where interest rates are set, unless the government goes all in on financing new construction and modernizing our infrastructure (a very good idea imo).

It's been the correct argument for years and nothing in overall economic conditions has changed to suddenly make it incorrect.

― Check Yr Scrobbles (Moodles), Tuesday, 15 December 2015 17:38 (50 minutes ago) Permalink

Well there's no precedent for the monetary policy we've had since 2008, so it seems a little complacent to say "well things should just work the way they always work."

A lot of the reasons in both directions seemed like garbage. It is depressing how much of them sound like "Well you pull the blue lever when the green light goes on, and the yellow lever when the red light goes on."

I agree that it is unusual to have rates so low for such a long time without any noticeable rise in inflation, just don't know why that now justifies a change in course designed to curb non-existent inflation.

What is opaque to me atm is what sort of questionable loans are accumulating on bank balance sheets. If the banks are busily financing more speculative bullshit as a way to chase high returns (as they did from 2004-2008), then the Fed has better and more direct ways of curbing those hijinks than just raising rates. Of course, that would require them to exercise their regulatory muscles, which in turn would precipitate deafening howls of rage from the banks and stock markets, so they will probably just monkey with the funds rate and cross their fingers that something good happens.

Well there's no precedent for the monetary policy we've had since 2008, so it seems a little complacent to say "well things should just work the way they always work."

― on entre O.K. on sort K.O. (man alive), Tuesday, December 15, 2015 1:31 PM (22 minutes ago) Bookmark Flag Post Permalink

i agree with this. a lot of the new ideas for how things work now (neo fiserism) are pretty bonkers though

My understanding is that US real wage growth has been stagnant for more than two decades and whatever economic growth based in consumer spending the US has experienced during that time was mainly driven by increases in consumer debt. With so many manufacturing jobs having moved overseas we're going to have excess capacity in the labor market for the foreseeable future, regardless of where interest rates are set, unless the government goes all in on financing new construction and modernizing our infrastructure (a very good idea imo).

― a little too mature to be cute (Aimless), Tuesday, December 15, 2015 1:08 PM (46 minutes ago) Bookmark Flag Post Permalink

Larry Aimlessummers

aimless summers sound pleasant i could use more of those

it's too bad we didn't do more infrastructure investment while rates were so low

― rap is dad (it's a boy!), Tuesday, December 15, 2015 12:56 PM (1 hour ago) Bookmark Flag Post Permalink

rates are still low, it's just .25%! and the market thinks they will be low for decades

Congress couldn't even pass a transportation bill for the past five years. They aren't going to do anything as radical as massive infrastructure investment.