Interest rates are expected to go up again after the Federal Reserve’s two-day policy meeting comes to a close Tuesday and Wednesday. The Fed is widely expected to raise its benchmark interest rate by a quarter of a point to 1.25 percent. While the move is hardly a surprise, it’s not without critics who say the economy is still too sluggish for a rate hike.
“I think the reason is that Janet Yellen and some members of the Fed are feeling political pressure and banker pressure to raise rates,” said Edward Stuart, professor emeritus of economics at Northeastern Illinois University. “One of the continued criticisms of the Fed is that they listen to bankers and not enough to the American people, and bankers always want higher rates.”
Henrik Rasmussen, founder and president of the business and investment consulting firm Argonne Global, disagrees. “I think it’s difficult for anyone, let alone the Fed, to decide the appropriate price of anything. In a free market you have supply and demand, and that’s how interest rates should be set.”
The Fed is also expected to outline a plan to shrink its massive portfolio of bonds, an end to an economic stimulus program that began during the Great Recession.
Stuart says it can be taken as a positive sign about the economy, but also notes, “when they’re selling bonds they own it puts downward pressure on bonds, and when bond prices go down, it’s the same thing as the interest rates going up.”
“The broader issue is that the Fed, since the financial crisis, has been in the business of propping up deficit spending by the federal government,” Rasmussen said. “That is bad for the economy. I don’t think the Fed is the main culprit. You can say the Fed is a co-conspirator. The main culprit is the federal government living beyond its means.”
As the Fed’s policymakers gather, some economists are calling for the Fed to raise its target inflation rate and foster economic growth.
“I think in general inflation is a bad thing, because it punishes savers,” Rasmussen said. “Innovation is what drives the economy, and innovation typically has a deflationary effect. That’s why the price of your computer goes down, or at least the price of computing power. I don’t think anyone would complain about that.”
But Stuart thinks raising the target inflation rate could jump-start economic growth. “(The U.S. economy is) like a car that’s not running at full capacity, and needs a little more gas to make it go faster. Or to keep the car analogy going, the inflation rate is kind of a measure of RPMs, and we need to get the RPMs up a bit.”
There’s also an ongoing question over vacancies on the Federal Open Market Committee – and concern in some quarters that the GOP-led Congress is aiming to repeal the Dodd-Frank financial regulations enacted in 2010.
On the show
Stuart and Rasmussen join Chicago Tonight for a conversation about interest rates and the U.S. economy.
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