Risks for the Economy

There's uncertainty outside the United States. And inside.

The Federal Open Market released the minutes from its June 16-17 meeting, and the first part was a list of risks for the economy or, as the minutes put it, “reasons to be cautious in assessing the outlook.” (The central bank has probably never used the phrase, “reasons to be cheerful.”) Some members of the FOMC apparently pointed to the risk that the weaker-than-anticipated rise in U.S. economic activity over the first half of the year could reflect factors that will continue to hamper sales and production, and so economic activity might not have sufficient momentum going forward. In particular, they fretted that consumers could remain cautious or that the drag on sectors affected by lower energy prices and the higher dollar could persist.

Then there’s the uncertainty arising from problems well outside the U.S. economy—such as about whether Greece and its creditors will reach any kind of agreement, and about the pace of economic growth in other important places, such as China, whose economy has been wheezing a bit lately. Other concerns of Fed panjandrums were about productivity growth in the U.S. economy. A rebound in productivity growth in coming quarters might restrain hiring and thus slow the improvement in the labor market. But if productivity growth remains weak, the labor market might tighten more quickly and inflation would rise more rapidly than anticipated (though a little more inflation would raise the rate from very weak to just plain weak).

What does the Fed mulling mean for interest rates? The question won’t go away until the historic day when the Fed finally gets around to an uptick, but even then it’s been expected so long that the impact will likely only be psychological, and fleeting. Astute businesspeople—and that includes anyone doing serious commercial real estate deals—have already build a little interest risk into their calculations. A little because the Fed isn’t likely to raise rates very much very fast. Even so, the early 2010s rate is an anomaly compared with the last 50 years, and can’t last forever. Just for comparison: the most recent peak was 2006, when the rate topped at 5.25 percent, and even that’s historically low. Through much of the 1960s to the 1990s, the Fed funds rate spend a lot of time between 5 percent and 10 percent, and notoriously crested at 19 percent-plus in 1981, as the Fed strove to kill inflation.

The Fed said: “During their discussion of economic conditions and monetary policy, participants commented on a number of considerations associated with the timing and pace of policy normalization. Most participants judged that the conditions for policy firming had not yet been achieved; a number of them cautioned against a premature decision.” But—”some participants viewed the economic conditions for increasing the target range for the federal funds rate as having been met or were confident that they would be met shortly.” So Fed interest rate policy is still, we’ll get around to it when we get around to it.