Federal Reserve officials left the short-term interest rate near zero on Wednesday — again. But as the lead story in Thursday’s Wall Street Journal reported, the nation’s central bank also “dropped several hints” that might finally raise that rate “as early as September.”
Sure. And your check is in the mail.
Pardon the skepticism, but the Fed has frequently sent similar signals since it lowered the rate to near zero in late 2008 to help counter the financial crisis sparked by the mortgage-market meltdown.
And Fed Chair Janet Yellen has continued those familiar “coming soon” notices since Ben Bernanke, her predecessor, stepped down early in 2014.
Of course, the Fed reasonably links raising rates to raised confidence in an ongoing economic recovery of debatable strength. Economists predictably differ on whether it should be increased.
Among the risks of low rates is the creation of market bubbles. Among the risks of raising rates is slowing down a sluggish recovery — though figures released Thursday showed 2.3 percent growth in this year’s second quarter but an upward revision to 0.6 percent first-quarter growth.
Another statistic closely watched by the Fed is inflation, now officially just 0.1 percent — a statistic many Americans fairly find dubious.
From that Journal story: “The Fed doesn’t want inflation above 2 percent because it saps household purchasing power. It also doesn’t want inflation below that threshold because it is associated with soft wages, business profits and economic vitality. That, in turn, makes it harder for households and businesses to pay off debts.”
At least unemployment has fallen by nearly half in the last five years to 5.3 percent in June.
Then again, a significant portion of that decline is due to a historically low labor-participation rate as millions of Americans have left the workforce.
And as usual, Fed-speak remains characteristically cryptic.
So prepare for a rate hike.
Meanwhile, however, former Fed head Alan Greenspan was quite clear with this blunt warning Wednesday during an interview on CNBC:
“To me the discussion today shouldn’t even be on monetary policy. It should be on how do we constrain this extraordinary rise in entitlements.”
Those overdue, politically painful decisions on Medicare and Social Security must be made by elected officials in Washington, not the Federal Reserve Board.
And that long-term challenge dwarfs the stakes of when — or if — the Fed finally raises short-term interest rates.