Will they or won’t they? That’s the question the market has for the Federal Open Market Committee (FOMC).
For nearly a year, economists and financial experts have predicted that the Federal Reserve would begin to raise interest rates starting in June. However, due to a plethora of weak economic data, any possible rate hike could transpire in September. But will it happen at all in 2015?
Interest rates haven’t been touched since December 2008, and the last time they were raised was in 2006. Former Fed Chair Ben Bernanke repeatedly stated in commentary that the central bank would raise rates once the unemployment rate dipped to 6.5 percent. The United States jobless rate is under six percent, and yet the Fed hasn’t amplified rates.
What Fed Officials and Market Leaders Say
Federal Reserve Bank of Chicago leader Charles Evans said in a speech in Columbus, Indiana that raising rates this year would be a bad move on the part of the United States central bank. Evans posited that timid economic growth, a lackluster labor market and low inflation levels are reasons why the Fed should postpone any boost in interest rates.
“Economic activity appears to be on a solid, sustainable growth path, which, on its own, would support a rate hike soon,” stated Evans (via The Wall Street Journal). "However, the weak first-quarter data do give me pause, and I would like to see confirmation that they are indeed a transitory aberration."
Meanwhile, Loretta Mester, president of the Cleveland Fed, and John Williams, president of the San Francisco Fed, suggested that there are still two months left of key economic insights before making a decision to touch interest rates.
"Really positive data trends, improvement in the labor market, signs that improve the confidence and the expectation that inflation will move back to 2 percent – I mean could imagine that constellation of data coming in, whether before June or meetings right after that too," Williams said, notes Reuters. "But that would require the data to be good."
Warren Buffett, the Berkshire Hathaway chairman and CEO, told CNBC on Friday that it could be very difficult for the Fed to raise rates considering that the first quarter of 2015 was very weak. He also cited the negative rates over in Europe – the European Central Bank’s (ECB) Mario Draghi implemented negative rates late last year in addition to extensive quantitative easing measures.
Critics Think It’s All Talk (Or Is It?)
Due to mounting public and private debt levels and the unsound fundamentals of the stock market, many contrarian investors purport that it would be nearly impossible for the central bank to boost rates. Instead, the Fed would have to maintain near-zero rates to maintain minimal debt servicing payments – both the governments and consumers – and to allow money to flow through to Wall Street.
Peter Schiff, CEO of Euro Pacific Capital and ardent Fed critic, told CNBC last week that all of the recent influx of tepid economic data is because of the Fed and its QE policy of the last several years. The Fed can’t raise rates, argues Schiff.
"They’re still going to pretend that there’s a rate hike somewhere at the end of this rainbow. But that’s not going to happen," said Schiff. "Maybe they will acknowledge a softening of the economy, which will be a gross understatement. Look at the horrible data that came out today. And this was April data, so you can’t just excuse this and blame it on the weather."
Schiff, author of "Crash Proof," has long contended that the Fed would soon initiate a fourth edition of QE because Wall Street can’t function on its own without any stimulus or easy money.
Robert Wenzel of Economic Policy Journal, who is author of "Fed Flunks" and another opponent of the Fed, opines that it’s wrong to assume that the Fed can’t raise rates because this implies an incorrect analysis of present Fed thinking. Moreover, says Wenzel, this kind of analysis doesn’t take into account the market forces that could very well encourage the Fed to raise rates "even if they don’t start to raise rates on their own sooner."
This is a part of the reason why the central bank should not be in control of interest rates. It, instead, should be a function left to the free market. A centrally-controlled interest rate creates distortion and malinvestment in the economy. Similar to prices, interest rates send signals to the markets, informing market participants of capital, savings and loans.
What we have today is a system whereby a small group of people know what interest rates should be, and, in the process, manipulates economic conditions.