# Why is the Fed so anxious to raise interest rates? **URL:** \ **Category:** Great Debates\ **Created:** [August 25, 2015, 12:14am UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785 "2015-08-25T00:14:33Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2015, 12:14am UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/1 "2015-08-25T00:14:33Z")
From [Reuters](http://www.reuters.com/article/2015/08/24/us-usa-fed-lockhart-idUSKCN0QT28Z20150824): > [@](#): > > A top U.S. central banker appears to have cooled to the idea of an interest rate hike next month, saying on Monday only that the Federal Reserve will likely begin raising rates “sometime this year.” > > Just two weeks ago, Atlanta Fed President Dennis Lockhart told reporters he was “very disposed” to a rate hike in September. [Inflation rates for this year](http://www.usinflationcalculator.com/inflation/current-inflation-rates/) are: Jan.: -0.1 Feb: 0.0 Mar: -0.1 Apr.: -0.2 May: 0.0 June: 0.1 July: 0.2 The Fed itself has said its goal is 2%. Back to the Reuters article again: > [@](#): > > “I expect the normalization of monetary policy — that is, interest rates — to begin sometime this year,” Lockhart said. When Lockhart says “normalization,” what does he mean by that? What is a “normal” interest rate? Why would the Fed ever raise interest rates, in the absence of actual inflation? ---
**Author:** ![Stringbean](https://avatars.discourse-cdn.com/v4/letter/s/d6d6ee/32.png) [@Stringbean](https://boards.straightdope.com/u/Stringbean)\ **Post date:** [August 25, 2015, 12:41am UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/2 "2015-08-25T00:41:56Z")
A normal interest rate is a rate that actually charges interest. It’s not called “free money rate” for a reason. Borrowing is supposed to have consequences. Allowing large financial institutions to borrow without the requisite return of interest provides a perverse incentive to borrow as much as possible and see what shit sticks to the wall. It is, historically, untreaded territory for interest rates to be so low for so long. Given the strong growth in the economy, particularly in employment, inflation tendencies are growing and a measured return to a normal interest rate is in the best interest of the economy as a whole. The Chinese meltdown is, of course, throwing a wrench into that equation. The Fed will likely be forced to keep it where it is for the time being. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 25, 2015, 1:39am UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/3 "2015-08-25T01:39:16Z")
Any yokel knows to take his foot off the gas when 50 feet away from a stalled car. But by that time it’s too late. BTW, the _real_ interest rate (rate minus inflation) is NOT “supposed” to be near zero; indeed its size correlates with economic health. (In a healthy economy competition for investment capital bids up rates.) But, despite these comments, I have no opinion on what the Fed should do. The economy is sailing through uncharted waters. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2015, 2:52am UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/4 "2015-08-25T02:52:14Z")
> [@Stringbean](#): > > A normal interest rate is a rate that actually charges interest. When you say a normal interest rate is one “that actually charges interest,” are you saying interest rates are currently zero? Because I got a good interest rate when I bought my last car, but it wasn’t 0. > [@](#): > > It’s not called “free money rate” for a reason. What’s not called “free money rate”? > [@](#): > > Borrowing is supposed to have consequences. Allowing large financial institutions to borrow without the requisite return of interest provides a perverse incentive to borrow as much as possible and see what shit sticks to the wall. I’m not sure what you mean by this. Are you saying large financial institutions are borrowing interest-free? From whom? Are you saying they’re being reckless? If so, what makes you say that? > [@](#): > > It is, historically, untreaded territory for interest rates to be so low for so long. [I chose 3 month Treasury bonds](https://research.stlouisfed.org/fred2/graph/?id=TB3MS,), because the recorded data went back the furthest: from 1934 (0.24%) to 1947 (0.38%) the highest rate was 0.38%. The lowest rate was 0.02% (1940). That’s 13 years. From 2009 until now, interest rates have been lower than that: 0.13% in Jan of 2009 and 0.03% as of July 2015. The highest rate was 0.21%, in March of 09. So interest rates have mostly been lower, by about 0.1% - 0.3%, but for a shorter time - about 6 years. Having said that, during the 6 years of low interest rates, the unemployment rate has fallen from about 10% to about 5.3%, with little or no inflation. If it’s a previously untried experiment, it seems to have been a success. > [@](#): > > Given the strong growth in the economy, particularly in employment, inflation tendencies are growing and a measured return to a normal interest rate is in the best interest of the economy as a whole. That’s a statement, but you haven’t provided any argument or support for it. The most recent inflation rate was 0.2%. [Inflation has actually been falling over the last several years](http://www.usinflationcalculator.com/inflation/current-inflation-rates/) - from 3% in to 0.2% now, not growing. > [@](#): > > The Chinese meltdown is, of course, throwing a wrench into that equation. The Fed will likely be forced to keep it where it is for the time being. But you still think interest rates need to be raised, because…? ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 25, 2015, 4:53am UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/5 "2015-08-25T04:53:40Z")
A couple of other factors. One thing a central bank does when the economy starts to lose steam is to lower interest rates. If they are already near zero (and banks borrowing from each other get better rates than you or I do) there is nowhere to go. Inflation encourages spending. If you know the price of something you want is going to go up next year, you buy it now. If the price is going to stay static you have an incentive to put off the purchase. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [August 25, 2015, 5:36am UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/6 "2015-08-25T05:36:00Z")
You are cruising along a highway at night; no cars are around you. How much pressure should you put on the gas peddle? What is the natural rate of pressure on the gas peddle? The natural rate involves sufficient pressure to stay at the desired highway speed. _It varies with terrain and road conditions_. Similarly interest rates should be adjusted so as to attain full employment/ the natural rate of unemployment / NAIRU: the non-accelerating inflation rate of unemployment. I don’t think we’re there yet. That said, core CPI has ticked up to 1.8 percent over the past year. We’re within striking distance of 2.0%, which the Fed says is its target but really appears to be a soft ceiling. This is misguided. For reasons discussed in other threads, the Fed needs to shift to nominal GDP level targeting or a higher target rate of inflation- I’d prefer the 3-4% range, though even that is arguably too low. That way they can secure lower real interest rates if there’s an adverse shock to the economy. But they want 2% core inflation over the medium run. But what’s the rush? Why not wait until rates hit 2.25%, then ease them down to 2%? We’ve had inflation under 2% for the last 7 years or so after all. Former FOMC member Narayana Kocherlakota advocated a 2.25% trigger. Why doesn’t the Fed hit its 2% target from the top: that would insure that positive and negative risks are more balanced? There are 2 categories of explanation on the table. 1. Krugman, this week. He walks through a number of possibilities [here](http://krugman.blogs.nytimes.com/2015/08/24/rate-hike-fever/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body) and in a freebe manner [here](http://equitablegrowth.org/2015/08/24/must-read-paul-krugman-rate-hike-fever/) (excerpts). But I also suspect that a lot has to do with the urge to resume a conventional central-banker role. The whole culture of central banks involves saying no to stuff people want, taking away the punch bowl as the party gets going, having the courage to do unpopular things; everyone wants to be Paul Volcker. The Fed is really, really eager to return to that position — and is, I fear, engaging in wishful thinking, believing much too readily that a return to normalcy is appropriate. It’s not. I’m with Larry here: this attitude has the makings of a big mistake. Think Japan 2000; think ECB 2011; think Sweden. Don’t do it. Or think about the US in 1936 for that matter. 1. The 2nd has to do with “Financial stability”. The Fed cares about the level of short term rates, but they are also concerned with raising rates too quickly. Long term rates are low now and the markets are used to very low rates. Maybe they will have a seizure if you raise rates by a quarter point 8 times in a single year. So the Fed would rather take things slow. But if they take things slow, they need to start earlier. Ookay, say I. But now we have financial instability. IF we get drops in the stock market of 25% or more, we should respond like Greenspan did to the 1987 crash: drop real rates by 2 percentage points. Except we can’t do that, because rates are currently under 0.25%. The higher inflation is, the more stimulus the Fed is capable of applying to the economy with conventional policy. So I guess the Fed should launch QE4 under such circumstances. I don’t know if it works, but it’s the only tool they have left (nominal GDP level targetting excepted). At any rate explicitly postponing a rate hike until after December 2015 would be prudent and is possibly too little. Say the words: “The Fed is ready to serve as a source of liquidity to support the economic and financial system.” Incidentally, the go-to guy for watching the Fed is [Tim Duy’s blog](http://economistsview.typepad.com/timduy/). ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [August 25, 2015, 6:38am UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/7 "2015-08-25T06:38:18Z")
Over at the Financial Times, Larry Summers opposes a rate increase. Yes, that Larry Summers. [The Fed looks set to make a dangerous mistake | Financial Times](http://www.ft.com/cms/s/2/f664a7e0-4978-11e5-b558-8a9722977189.html?ftcamp=published_links/rss/global-economy/feed//product#axzz3jguha4fk) Brad DeLong excerpts and adds his own commentary: [http://equitablegrowth.org/2015/08/24/none-concerns-inflation-employment-financial-stability-inequality-justify-raising-interest-rates-next-year/](http://equitablegrowth.org/2015/08/24/none-concerns-inflation-employment-financial-stability-inequality-justify-raising-interest-rates-next-year/) Summary: the balance of risks don’t support the case for a rate increase: “I doubt that, if rates were now 4 per cent, there would be much pressure to raise them.” ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 25, 2015, 12:53pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/8 "2015-08-25T12:53:31Z")
I’ve always thought that the inflation measurement _as used by the FRB to set interest rate_ should give a very low weight to imported commodities (like petroleum) whose prices are set by the world market (and perhaps a positive weight to asset price inflation). The reason is simple. The idea of tightening money is to prevent shortages, or excess demand for domestic production. But petroleum price does NOT reflect domestic demand(\*), it reflects world conditions not subject to FRB policy. Comments? (\* - Yes, the U.S. is such a big player that its domestic demand can effect world commodity prices. For the sake of this discussion assume we’re discussing central bank policy of a somewhat smaller country.) ---
**Author:** ![Ravenman](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ravenman/32/2929_2.png) [@Ravenman](https://boards.straightdope.com/u/Ravenman)\ **Post date:** [August 25, 2015, 1:24pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/9 "2015-08-25T13:24:50Z")
> [@LinusK](#): > > When you say a normal interest rate is one “that actually charges interest,” are you saying interest rates are currently zero? Because I got a good interest rate when I bought my last car, but it wasn’t 0. > > What’s not called “free money rate”? > > I’m not sure what you mean by this. Are you saying large financial institutions are borrowing interest-free? From whom? Given how much you post about economic issues, you can’t possibly be serious with these questions… can you? ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2015, 1:26pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/10 "2015-08-25T13:26:16Z")
> [@septimus](#): > > Any yokel knows to take his foot off the gas when 50 feet away from a stalled car. But by that time it’s too late. You’e comparing Fed policy to driving a car. It’s true that you should take your foot off the gas when you see a stalled car in front of you. But where is the stalled car? [US GDP growth was -2.8%](https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:USA:IND:GBR&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_kd_zg&scale_y=lin&ind_y=false&rdim=region&idim=country:USA&ifdim=region&hl=en_US&dl=en&ind=false) in 09. Since then it’s averaged about 2%. Real GDP growth has averaged about 3.3%, since 1929. To put it differently, we’re going slower than average - and that average includes recessions, the Great Recession, and the Great Depression. During periods of high employment we’ve grown in the 4%-6% range. To use your car analogy, we’re not going very fast, and there’s nothing we’re about to crash into. > [@](#): > > BTW, the _real_ interest rate (rate minus inflation) is NOT “supposed” to be near zero; indeed its size correlates with economic health. When you say the real interest rate is not supposed to be near zero, why do you say that? Why shouldn’t the real interest rate be near zero? > [@](#): > > (In a healthy economy competition for investment capital bids up rates.) Does the health of the economy drive interest rates? Or are interest rates controlled by the Fed? Because I would submit that the Fed controls interest rates, not the economy; and that low interest rates tend to improve the economy, while high interest rates lead to recessions and unemployment. > [@](#): > > But, despite these comments, I have no opinion on what the Fed should do. The economy is sailing through uncharted waters. ---
**Author:** ![andros](https://avatars.discourse-cdn.com/v4/letter/a/e480ec/32.png) [@andros](https://boards.straightdope.com/u/andros)\ **Post date:** [August 25, 2015, 1:27pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/11 "2015-08-25T13:27:01Z")
> [@Ravenman](#): > > Given how much you post about economic issues, you can’t possibly be serious with these questions… can you? You mean the Fed _doesn’t_ determine the terms of my car loan?? 😃 ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2015, 1:41pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/12 "2015-08-25T13:41:01Z")
> [@Voyager](#): > > A couple of other factors. One thing a central bank does when the economy starts to lose steam is to lower interest rates. If they are already near zero (and banks borrowing from each other get better rates than you or I do) there is nowhere to go. > > Inflation encourages spending. If you know the price of something you want is going to go up next year, you buy it now. If the price is going to stay static you have an incentive to put off the purchase. My understanding is that banks aren’t lending to each other right now. They have so much in excess reserves, they have no need to borrow. The Fed is, however, paying them 0.25% on excess reserves. Inflation does encourage buying. Inflation itself, however, is the result of supply and demand: (a) the demand for money, (b) the supply of money, (c) the demand for goods and services, (d) the supply of goods and services. So long as the economy is able to produce more goods and services to supply a growing demand, the result is GDP growth and increased employment, without inflation. Inflation occurs when, for whatever reason, the economy is not able to produce enough goods and services to meet demand. I’d argue we’re not there yet: our economy is capable of producing substantially more than it’s producing now. To put it differently, GDP could grow faster, without creating inflation. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2015, 2:39pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/13 "2015-08-25T14:39:00Z")
> [@Measure\_for\_Measure](#): > > You are cruising along a highway at night; no cars are around you. How much pressure should you put on the gas peddle? What is the natural rate of pressure on the gas peddle? I don’t think that’s a good analogy: we have lots of information about the economy. If you want to use the economy as a car example, I’d argue we have a pretty good sense of what’s around us, and we can see a reasonable distance ahead. > [@](#): > > The natural rate involves sufficient pressure to stay at the desired highway speed. _It varies with terrain and road conditions_. Similarly interest rates should be adjusted so as to attain full employment/ the natural rate of unemployment / NAIRU: the non-accelerating inflation rate of unemployment. I don’t think we’re there yet. What is the non-accelerating inflation rate of unemployment? Is it 2%? 5%? Some other number? > [@](#): > > That said, core CPI has ticked up to 1.8 percent over the past year. I’m curious where you got the 1.8% number. [The Fed is showing 0.2%](https://research.stlouisfed.org/fred2/graph/?id=CPIAUCSL,), as of July 2015. That’s up from -0.2% in January, but still down from 2.1% in May of last year. The [US Inflation Calculator](http://www.usinflationcalculator.com/inflation/current-inflation-rates/) is also reporting 0.2% inflation, as its most recent number. > [@](#): > > We’re within striking distance of 2.0%, which the Fed says is its target but really appears to be a soft ceiling. This is misguided. For reasons discussed in other threads, the Fed needs to shift to nominal GDP level targeting or a higher target rate of inflation- I’d prefer the 3-4% range, though even that is arguably too low. That way they can secure lower real interest rates if there’s an adverse shock to the economy. > > But they want 2% core inflation over the medium run. But what’s the rush? Why not wait until rates hit 2.25%, then ease them down to 2%? We’ve had inflation under 2% for the last 7 years or so after all. Former FOMC member Narayana Kocherlakota advocated a 2.25% trigger. Why doesn’t the Fed hit its 2% target from the top: that would insure that positive and negative risks are more balanced? > > There are 2 categories of explanation on the table. > > 1. Krugman, this week. He walks through a number of possibilities [here](http://krugman.blogs.nytimes.com/2015/08/24/rate-hike-fever/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body) and in a freebe manner [here](http://equitablegrowth.org/2015/08/24/must-read-paul-krugman-rate-hike-fever/) (excerpts). But I also suspect that a lot has to do with the urge to resume a conventional central-banker role. The whole culture of central banks involves saying no to stuff people want, taking away the punch bowl as the party gets going, having the courage to do unpopular things; everyone wants to be Paul Volcker. The Fed is really, really eager to return to that position — and is, I fear, engaging in wishful thinking, believing much too readily that a return to normalcy is appropriate. > > It’s not. I’m with Larry here: this attitude has the makings of a big mistake. Think Japan 2000; think ECB 2011; think Sweden. Don’t do it. Or think about the US in 1936 for that matter. > > 1. The 2nd has to do with “Financial stability”. The Fed cares about the level of short term rates, but they are also concerned with raising rates too quickly. Long term rates are low now and the markets are used to very low rates. Maybe they will have a seizure if you raise rates by a quarter point 8 times in a single year. So the Fed would rather take things slow. But if they take things slow, they need to start earlier. > > Ookay, say I. But now we have financial instability. IF we get drops in the stock market of 25% or more, we should respond like Greenspan did to the 1987 crash: drop real rates by 2 percentage points. Except we can’t do that, because rates are currently under 0.25%. The higher inflation is, the more stimulus the Fed is capable of applying to the economy with conventional policy. So I guess the Fed should launch QE4 under such circumstances. I don’t know if it works, but it’s the only tool they have left (nominal GDP level targetting excepted). At any rate explicitly postponing a rate hike until after December 2015 would be prudent and is possibly too little. Say the words: “The Fed is ready to serve as a source of liquidity to support the economic and financial system.” > Incidentally, the go-to guy for watching the Fed is [Tim Duy’s blog](http://economistsview.typepad.com/timduy/). Thanks for the links. I’m not seeing any signs of inflation, and I think the unemployment rate is still too high. It looks like [monetary base has fallen slightly](https://research.stlouisfed.org/fred2/graph/?id=BOGMBASEW,) in the last few months, from $4.1 trillion to $3.9 trillion. (That is of course still far higher than the $0.8 trillion in 08.) I’d argue the Fed should be increasing MB right now, and the Treasury should be spending more. The deficit has fallen from $1,413 billion in 09 to $485 billion in 2014. Deficit spending has fallen too much, too quickly. The combination of Fed purchases and Treasury sales is the best way to improve the economy. I’m sure Krugman’s theory is at least partly right. ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [August 25, 2015, 3:04pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/14 "2015-08-25T15:04:36Z")
> [@](#): > > Why would the Fed ever raise interest rates, in the absence of actual inflation? Well, [here](http://www.thefiscaltimes.com/Columns/2012/06/29/7-Reasons-the-Fed-Should-Raise-Interest-Rates) is an article giving 7 reasons to do so: > [@](#): > > 1. Interest on savings is an important element of personal income. As rates have come down, the income of millions of Americans has fallen. It also reduces the incentive to save for retirement, the down payment on a house and other desirable purposes. As I noted in an earlier column, if people were still receiving as much interest income as a share of their total income as they did in 2008, they would have $450 billion more per year to spend. > > 2. Low interest rates exacerbate the problems of defined benefit pension plans. They are required to discount their liabilities by the rate of interest rate. When rates fall, their liabilities go up because it raises the present value of future pension payments. Low rates also increase the incentive of pension fund managers to take on excessive risk in order to raise their rate of return. It would be much better if they had a risk-free form of investment, such as Treasury securities, in which they could invest and receive an adequate return. > > 3. Low interest rates and the perception that they will continue indefinitely, which the Fed has said it will do, discourages home buying. This may sound nonsensical, but it has been my experience as a buyer and seller of real estate that potential buyers are often motivated more by a fear that rates will rise than that prices will rise. I think the expectation of higher interest rates would force many potential home buyers off the fence and into the market. > > 4. Low interest rates keep energy and commodity prices high. This follows from the work of a famous economist named Harold Hotelling. If rates are high, miners and drillers will bring more out of the ground in order to invest the proceeds. But if rates are low, the opportunity cost of keeping oil in the ground is also low and so there is less incentive to bring it to market. Low interest rates have the same effect on other commodities by reducing the opportunity cost of holding stocks off the market in the hope of higher prices. If the expected increase in prices exceeds the rate of interest it is always in the interest of commodity owners to hold on to what they have. > > 5. The economist Joseph Stiglitz argues that low interest rates increase unemployment because businesses can cheaply invest in automation and labor-saving equipment. “Persistent low interest rates encourage firms…to use capital-intensive technologies, such as replacing low-skilled checkout clerks with machines,” he recently wrote. > > 6. Many economists believe that holding interest rates below their natural level invites malinvestment, that which would be uneconomical if rates were at normal levels. It is difficult to say what the natural rate of interest would be in the current environment, but Treasury securities appear to be at least 200 basis points (2 percentage points) below their historical levels across the board. > > 7. Low interest rates discourage banks from lending. Banks are presently sitting on $1.5 trillion of excess reserves that could be loaned immediately. One reason they don’t lend is because the Fed pays them interest on these reserves – a policy that began, perhaps not coincidentally, just at the beginning of the financial crisis. Although the rate is low – just 25 basis points, one-quarter of a percentage point – this is actually considerably more than banks can earn on all Treasury securities with maturities of less than 2 years, and not much below those on maturities up to 5 years. > > The problem with having the Fed simply raise interest rates is that it typically does so by pulling money out of the economy. It sells securities from its portfolio and takes the money received out of circulation. This would reduce aggregate demand, put downward pressure on prices, and exacerbate the economic crisis. > > So how is it possible to raise interest rates without tightening monetary policy? The answer is surprisingly simple – raise inflationary expectations. According to economic theory, lenders are mainly concerned about the real rate of interest – the market rate minus the expected rate of inflation over the life of a loan. If expectations of inflation rise, then interest rates should rise by the same rate. > > Thus, if the interest rate would be 3 percent in a zero inflation environment and lenders come to believe that inflation will be 2 percent, then the market interest rate they will charge on loans should rise to 5 percent so that they will still get the same 3 percent rate after inflation. > > The Fed can raise inflationary expectations just by saying that it intends to allow inflation to rise. If markets believe the Fed means it, they will react accordingly because they know that the Fed is the principal cause of inflation. Similar article from [Fortune](http://fortune.com/2014/10/08/federal-reserve-interest-rates-2/): > [@](#): > > The longer the central bank waits to raise interest rates, the greater the long-term risk to the U.S. economy. > > The jobs report last week brought plenty of good news. The economy added 248,000 jobs in September, beating expectations; unemployment ticked down from 6.1% to 5.9%. The August jobs numbers were also revised upwards from 142,000 to 180,000, and the private sector has added 10.3 million new jobs over 55 months of job growth, according to The New York Times. > > Some countervailing factors still prevail. The labor force participation rate has been steadily declining over the past decade and dipped again in September to 62.7%, suggesting that even though unemployment is declining, there are still plenty of people in the background who have simply stopped looking for work. The other big concern is that wage levels are not rising, putting a damper on financial prosperity even for the people who manage to find jobs. > > The Federal Reserve, which has indicated before that it would consider raising interest rates once the job market improves, is now at a crucial crossroads in this process and needs to decide which aspects of America’s economy will have greater impact on the future and should determine interest rates. Despite the conventional wisdom that the Fed should keep rates low well into next year to avoid derailing the recovery, waiting too long would be a serious mistake. ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [August 25, 2015, 3:29pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/15 "2015-08-25T15:29:53Z")
> [@septimus](#): > > Any yokel knows to take his foot off the gas when 50 feet away from a stalled car. But by that time it’s too late. > > BTW, the _real_ interest rate (rate minus inflation) is NOT “supposed” to be near zero; indeed its size correlates with economic health. (In a healthy economy competition for investment capital bids up rates.) > > But, despite these comments, I have no opinion on what the Fed should do. The economy is sailing through uncharted waters. Assuming I’m interpreting this correctly (always a tenuous thing), I’d say this pretty much hits the mark. Basically, the Fed uses a drop in interest rates to stimulate the economy during a recession. If the rate stays the same as it is right now, the Fed will have no tools available to it to try and stimulate the economy in the next recession, which WILL happen at some point…it’s the nature of a modern economy that you’ll have recessions. We are 6 years into the current recovery, so a recession is in our future in the next year or so. By that time the Fed needs to have raised interest rates so that, when that new recession comes they have the ability to lower those rates to stimulate the economy. ---
**Author:** ![RitterSport](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/rittersport/32/6326_2.png) [@RitterSport](https://boards.straightdope.com/u/RitterSport)\ **Post date:** [August 25, 2015, 3:36pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/16 "2015-08-25T15:36:00Z")
> [@XT](#): > > Well, [here](http://www.thefiscaltimes.com/Columns/2012/06/29/7-Reasons-the-Fed-Should-Raise-Interest-Rates) is an article giving 7 reasons to do so: > > Similar article from [Fortune](http://fortune.com/2014/10/08/federal-reserve-interest-rates-2/): The first article was written three years ago. How have those predictions panned out? For point 3, I’m pretty sure housing prices and home buying have increased since then. Point 4 is pretty laughable – oil has hit pretty serious lows. Point 5 – unemployment has come down. Point 6 – what’s the natural rate? I’m not really qualified to opine on 1, 2, or 7, but this looks like the author wants rates to be raised and is thrashing around for reasons to do so. And, with the passage of time, has been shown to be pretty wrong. ---
**Author:** ![RitterSport](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/rittersport/32/6326_2.png) [@RitterSport](https://boards.straightdope.com/u/RitterSport)\ **Post date:** [August 25, 2015, 3:37pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/17 "2015-08-25T15:37:02Z")
> [@XT](#): > > Assuming I’m interpreting this correctly (always a tenuous thing), I’d say this pretty much hits the mark. Basically, the Fed uses a drop in interest rates to stimulate the economy during a recession. If the rate stays the same as it is right now, the Fed will have no tools available to it to try and stimulate the economy in the next recession, which WILL happen at some point…it’s the nature of a modern economy that you’ll have recessions. We are 6 years into the current recovery, so a recession is in our future in the next year or so. By that time the Fed needs to have raised interest rates so that, when that new recession comes they have the ability to lower those rates to stimulate the economy. Maybe we should test that by raising interest rates to bring on the next recession sooner! ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [August 25, 2015, 3:43pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/18 "2015-08-25T15:43:32Z")
> [@RitterSport](#): > > Maybe we should test that by raising interest rates to bring on the next recession sooner! And when the next recession comes anyway? The Fed is just supposed to raise it’s hands and say ‘well, the interest rates are already at zero, so there isn’t anything we can do…good luck!’? The Fed would lose credibility if it can do nothing to help the economy in the next recession. Unless you want to posit that there won’t be a next recession and the good times, such as they are, will just keep rolling along? I suppose we COULD go to negative interest rates such as they are doing in Europe. How’s that working out for them? How would that work out for things like pension plans and underfunded entitlements with negative interest rates wrt rate of return? ---
**Author:** ![RitterSport](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/rittersport/32/6326_2.png) [@RitterSport](https://boards.straightdope.com/u/RitterSport)\ **Post date:** [August 25, 2015, 4:49pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/19 "2015-08-25T16:49:40Z")
> [@XT](#): > > And when the next recession comes anyway? The Fed is just supposed to raise it’s hands and say ‘well, the interest rates are already at zero, so there isn’t anything we can do…good luck!’? The Fed would lose credibility if it can do nothing to help the economy in the next recession. Unless you want to posit that there won’t be a next recession and the good times, such as they are, will just keep rolling along? > > I suppose we COULD go to negative interest rates such as they are doing in Europe. How’s that working out for them? How would that work out for things like pension plans and underfunded entitlements with negative interest rates wrt rate of return? Of course there will be more recessions. Raising rates now, though, will only hasten it. It happened in Sweden and in the UK. If the recession comes and rates are still low, the Fed can try quantitative easing again. Or, maybe congress can earn its keep and try some fiscal stimulus. We have crumbling infrastructure, and the bond markets are begging us to borrow from them. For quite a long time, real rates out to 10 years were negative – borrowers were going to pay us to borrow from them (in real terms) and instead we laid off federal workers and cut investments in infrastructure. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2015, 4:54pm UTC](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785/20 "2015-08-25T16:54:11Z")
> [@Ravenman](#): > > Given how much you post about economic issues, you can’t possibly be serious with these questions… can you? Yes. When I’m not sure what someone means, I ask. If I don’t ask, I won’t find out. [Next page](https://boards.straightdope.com/t/why-is-the-fed-so-anxious-to-raise-interest-rates/728785.md?page=2)