Raise the interest rate: Our view
Economy is finally durable. Housing bubble resulted from greed, but also of low interest rates.
In the early 1980s, the Federal Reserve set its benchmark interest rate, the rate at which major banks lend to each other on a short-term basis, at more than 19%. For years, inflation had been ravaging consumers, and by hiking interest rates the Fed set out to crush it.
Since the 2008 financial crisis, however, the central bank has been plagued by opposite concerns. With the worldwide economy in a slump and with deflation a greater worry than inflation, the Federal Reserve has kept the funds rate at astonishingly low levels — below 1% since 2008, and currently below 0.25%.
Higher rates hurt working families: Opposing view
A funds rate of 19%, which meant mortgages at similar levels, was highly abnormal. And so is a rate near zero. If for no other reason than to restore some semblance of normalcy, it’s time for the Fed to begin raising, starting with its closely watched meeting next week.
There are, to be sure, strong arguments for and against raising rates.
Opponents contend that with inflation under control, much of the world in or near recession and the stock market volatile, now could be the wrong time. World Bank chief economist Kaushik Basu urged a delay Tuesday, citing a rate hike’s potential impact on emerging markets.
Supporters point out that the U.S. economy finally appears durable enough to withstand a bump in rates. It has added 13 million jobs since the depth of the Great Recession. The jobless rate dropped to 5.1% last month, a level considered close to full employment.
An even more persuasive argument for raising rates is that the U.S. economy has never had rates so low for so long, and no one really knows what the effects will be. The housing bubble that caused so much grief to the global economy was the result of greed, avarice and dishonesty — but also of low interest rates.
Institutional investors such as pension funds, hedge funds and sovereign wealth funds were seeking decent returns from the conservative portions of their portfolios. With bonds and money market accounts paying so little, Wall Street invented a story about how it could package high-risk mortgages in such a clever way that the overall bundle would be low-risk while providing attractive returns.
The rest, as they say, is history. Today, investors are more attuned to scams like that. But they are also growing more desperate. They are holding trillions of dollars in short-term investments that they can’t, or don’t want to, invest in riskier asset classes such as stocks. With rising obligations of their own, they are not eager to be sitting on dead money.
Sooner or later, if it is not happening already, their money will find its way into the next too-good-to-be-true story. By modestly raising rates for the first time in nearly a decade, the Fed could reduce the risk of this happening. A rate hike would also give central bankers the ability to cut rates in the future should the economy take a turn for the worse and need stimulus.
The Fed has postponed the inevitable about as long as it can.
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