PRT_1050

We posed the question to our readers, “Do you think the Fed should raise rates this year?”

67% said “Yes, raise rates slightly”.

Why do you think the majority would feel this way?

An economist, which I’m not, might share several reasons.  For me, my answer would be this.  The Federal Reserve Board uses interest rates as its most important tool to steer the economy.  When the economy is doing badly, they lower rates.  When the economy recovers, they raise rates, so to keep inflation from over-heating.  Here, we saw the Fed drop rates to close to 0% around 2008, at the time of the last recession.

Like a Mustang GT headed towards a tree

The recession technically ended 2010, but yet the Fed hasn’t raised rates.  Understandably they don’t see a solid economy and they don’t want to risk plunging it into a recession.  However, I look at it this way: the economy was like a car going downhill in a snowstorm, headed hard left towards a tree (If you drove my Mustang GT in the winter, you would know this feeling well).  To counter that, you steer the car hard right.  However, what if the car doesn’t correct itself?  Do you keep the wheel pegged hard left?

A good driver knows that in order to completely lose control, you steer the car slightly left.

What I’m suggesting here is that by keeping rates pegged towards zero, the Fed has completely lost its ability to steer the economy if and when another recession surfaces.  You can’t go below 0% (or, more accurately, much below 0%).  Better would have been to ease rates upward at the sign of recovery, and let the economy adopt to the new norm of positive interest rates.

What does keeping rates low portend for the future?

The future?  Rarely do I forecast the economy but here I forecast a problem once another recession occurs, and they always do.  The Fed will have lost its ability to lower rates, causing the recession to possibly be a bad one.

What do you think?  Do you agree with me?  Disagree?

Take Care!

Michael Emerald, CFA

About the Author