When the Federal Reserve Board meets on Wednesday, it should not reward speculators who are betting the Fed will reduce key interest rates.
The economy is humming along very nicely right now, without need of any more stimulus. Plus, with public and private debt worldwide both at or near record levels, the last thing the Fed should do is encourage more borrowing by making the cost of such borrowing easier.
There also remains a need for the Fed to maintain its reputation for independence from political interference. Unless and until President Trump stops openly pressuring the Fed to cut rates, the Fed should be wary of doing so, for fear of looking like a lapdog for the White House.
Let’s review the situation. The national unemployment rate of 3.6% is at historic low. Wages are rising. Why would further stimulus be needed? Meanwhile, inflation, while not a current problem, has spent the past 12 months exactly on track for the Fed’s target of 2%. There’s no need to risk catalyzing it by cutting interest rates.
Nobody wants high interest rates, of course. But by historical standards, today’s 2.5% federal funds rate is remarkably low. And there’s a case to be made that modest interest rates incentivize private saving — which, of course, can serve as a counterweight to the risks inherent in high levels of personal and corporate debt. Those risks aren’t just private, but systemic. As we saw during the financial crisis of 2008, if too many people carry too much debt, a sudden jolt to the system can cause a chain reaction of personal bankruptcies. Those cascading defaults can upend the housing market and destroy the investment banks that underwrite that market.
The Fed’s best play, then, is to hold steady. Establishing long-term expectations of a federal funds rate of a modest 2.5%, rather than at some minuscule amount, could position the Fed well for future exigencies. Stock market day-traders may grumble for a while if the Fed doesn’t reduce rates now, but the Fed governors should ignore them. In the long run, short-term trading profits are far less important than stability, married to a salutary caution.
