The Fed Should Raise Rates

Asad Dossani
Nine days from now, the US Federal Reserve will meet to decide whether to raise interest rates. A month ago, it was widely expected that a rate rise would go ahead. Since the recent market turmoil, the consensus view has shifted. Current fed fund futures are pricing in a 19% probability that the Fed will raise interest rates.

What the Fed will do is anyone's guess. And everyone has an opinion (myself included). Last week, the head of the IMF, Christine Lagarde, urged the Fed to hold off raising interest rates until things calm down. She's referring here to the recent market volatility.

Her comments nicely illustrate the current state of monetary policy. The Fed has a dual mandate. First, keep inflation low and stable. And second, minimize unemployment. Both of these are sensible.

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Nowhere in that mandate does it say we need to keep stock prices high.  But unfortunately, this is exactly what's going on. A month ago the Fed was ready to raise interest rates. Since, then stock markets have fallen.  Now, the rate rise is in doubt, even though economic data doesn't suggest any recent slowdown.

Monetary policy should not be responding to stock prices. Stock prices go up and down for all sorts of reasons. Sometimes these are fundamental, and sometimes it is just changes in sentiment. Half the time we don't even know why stock prices moved the way they did. Does it really make sense to base monetary policy on something as fickle as short term market movements?

Instead, monetary policy should respond to economic data. Economic data include inflation, GDP, unemployment, etc. These are the indicators that actually matter for economic prosperity.

And right now, the economic data makes a clear case for increasing interest rates.  US employment growth and GDP growth have been strong for some time.

If the stock markets are going to fall because interest rates go up, then so be it. With all the cheap money that has flooded markets in recent years, it wouldn't be a bad thing if some of that is removed. There's another strong argument for raising interest rates, and I'll come back to this in the next article.

Do you think the Fed should raise rates? Share your views in the Club or share your comments here.

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4 Responses to "The Fed Should Raise Rates"
k.v.subba rao
12 Sep, 2015
I am more concerned about RBI decreasing the interest rates. In fact I urge Rahgu Ram Rajan not to reduce interest rates keeping in mind the interest of many middle income group citizens and pensioners. Reduced interest rates would benefit the corporates directly and politicians indirectly. Corporates owners would brag about their increased wealth But the middle income people and pensioners would suffer on one side by higher cost of living and on the other side with reduced income flows. Actually some social groups should take up this cause. forcefully. k.v.subba rao Like 
Pramod Phadke
09 Sep, 2015
Whether Fed increases the rates or not does not concern me. Near here, I would be certainly concerned if Reserve Bank of India (RBI) reduces the rates further. I have seen the statistics which show that the inflation is on the decline. I have my doubts here. Last few weeks, the vegetables are routinely Rs 20 or 25 per quarter kilo. That is 80 to 100 Rs/kg. That has not changed even one bit in the last two years. That makes me doubt the statistics. It is my observation that Govt statistics are more often than not unreliable. A case in point is the Inflation Index published by Income Tax department every year for indexing of long term capital gain. The market price inflation is much much more than what Income Tax allows you to deduct as current cost of your asset. Obviously, the aim of the department is to allow you less deduction so that you pay more tax on capital gains. Thus, if the people or persons who issue statistics have an axe to grind, can easily issue misleading or wrong or manipulated statistics. Hence, any decisions based on such statistics are potentially wrong.Like (1)
Srikanth
08 Sep, 2015
Cheap money? What are you referring to?Like 
Shekar golishekargoli
08 Sep, 2015
I don't think so till April 2016 Like 
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