Surrounding the mortgage-driven economic collapse of 2008, the Federal Reserve loaned banks billions of dollars to provide the liquidity needed to keep afloat and to make lending possible. After that, the Fed consistently purchased billions of dollars of bonds to make even more money available to be spent on business expansion, wages and capital construction. That was another means to provide some underpinnings for an economy that was almost dragging bottom.
Now, the Fed’s loans to the banks have been repaid with interest and the bond-buying greatly reduced. On Wednesday of this week the Federal Reserve Board will consider whether the economy is sufficiently strong to absorb a 25 basis point rate increase. That one-quarter percent applies to bank to bank lending, but its implementation will signal that even in the middle of mixed economic news the Federal Reserve believes that the economy is on firm footing. The interest rate jump will mean slightly higher borrowing costs for consumers and an increase in bond and savings account interest rates.
It has been nine years since the Fed raised the rate, an indication of just how long it has taken to recover from the collapse of the over-inflated mortgage market, a time when home loans, which borrowers had no ability to repay, were packaged and sold to investors. The risk at the highest and lowest levels was all but ignored.
In increasing the rate, which we expect the Fed to do, the Fed will likely point to a steady increase in employment numbers, a slight increase in industrial output and adequate retail sales. Offsetting the jobs number, however, is the fact that wages are unchanged.
But while the Federal Reserve’s mission is to encourage employment and to hold prices stable, today’s economy is not one that is able to be controlled. Most economists say that energy prices have fallen too far, that oil at less than $50 a barrel too severely punishes a large sector of the economy, even if consumers benefit a bit more. OPEC countries, determined not to lose market share, refuse to cut back production while the United States is producing more.
Most commodities, in fact, are at their lows. There is more corn and soybeans than the country can consume, and more minerals than are needed. The Chinese, with their slow economy, are exporting steel at below cost.
The strong dollar, which hurts exports, has been unexpected, as well. The euro has fallen from about 1.25 dollars to 1.10. The British pound from 1.65 dollars to 1.5. Rather than making large amounts of money available to strengthen their post-mortgage collapse economies, European countries took a more austere tack. That is generally conceded to have been the wrong decision, as the U.S. recovery in contrast has shown. In a couple of European countries, interest rates are at zero or slightly negative. Lending institutions, which are built on lending deposits, have no borrowers for their funds.
U.S. financial markets have been debating the likelihood of a Fed rate increase for a year while various components of the economy moved up and down. It is time for the Federal Reserve to add to the economy’s stability and strength by moving forward with a rate increase, which can occur this week. Whether additional increases are possible will be determined at subsequent Fed meetings.
Let’s put the first rate increase in place in order to move the economy forward.
