(WASHINGTON POST) Matt O’Brien — People used to say the Federal Reserve had to raise rates to fight nonexistent inflation. Then they said the Federal Reserve had to raise rates to fight nonexistent bubbles. And now they say the Federal Reserve has to raise rates for nonexistent reasons. Just, you know, to show that it can.
This is not progress.
What is, though, are all the jobs the economy has been adding. That’s been an average of 243,000 a month for the last 12, which has been enough to drive unemployment down, as reported Friday, to 5.1 percent. Now, that sure looks like a return to economic normalcy, so shouldn’t the Fed return us to interest rate normalcy by increasing them from zero? Maybe. The Fed, after all, doesn’t want to wait until the economy is obviously overheating to start raising rates, but rather right before it does so.
The only problem with that is there aren’t any signs the economy is anything other than properly heated right now. Workers still aren’t getting bigger raises, just 2 percent a year compared to the 3.5 to 4 percent they normally would, and inflation is still dead at just 0.3 percent. That picture doesn’t change even if you strip out volatile food and energy prices, with so-called core inflation at only 1.2 percent, and not even trending up. Given that raising rates too early would hurt more than raising them too late—more unemployment we don’t want would be worse than more inflation we do—and it’s hard to see why the Fed should do so this September, like it’s said it might.