Economy Watch: Close, But No Cigar for Interest Rate Hike

By Dees Stribling, Contributing Editor

The Federal Open Market Committee did what was expected on Wednesday by not pulling the trigger on an interest rate increase from practically zero percent to a little more than practically zero. Apparently the health of the economy is close to being ready for that kind of interest-rate shock, but not quite there yet, in the estimation of the nabobs at the central bank. Soon it will be seven years since interest rates, which in the more “normal” post-WWII decades has been a bit north of 5 percent, were adjusted that low. So it might be a little hard to get used to even a small interest rate rise, at least at first.

According to the FOMC statement, “economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat.” That sounds like a good thing, more or less, but not a great thing. The statement continues: “Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft.” Again with the “moderate.” Moderate doesn’t add up to an interest rate increase—this time around.

At the press conference after the release of the statement, Fed Chair Janet Yellen was asked about the International Monetary Fund’s urging that the central bank not raise rates this year. Yellen was polite, but essentially said that this is none of the IMF’s business, and that any hikes that the Fed undertakes this year will be based on a forecast different from the IMF’s. (The IMF specifically said that tightening this year may be good for the United States but not as much for the rest of the world.) Yellen also stressed that the markets should focus more on the entire scope of tightening, not just liftoff, or the first movement of rates.

Interestingly enough, she also noted that with the benefit of hindsight, maybe the FOMC should have tightened more vigorously during the run up of the housing bubble in 2004-06, to try to put some water on that fire. But that was then, and the Fed chair also said it would be a mistake to promise a measured pace of tightening in the current climate—as in quarter-point raises at each followed meetings until things are more historically normal. The Fed has no intention of doing that, she stress, asserting that each rise will depend on the data.