The Fed Should Give Itself Room To Breathe

This indecision over whether to tighten rates is wasted angst.

In its Federal Open Market Committee statement, the Fed modestly upgraded its outlook for jobs and housing, but it crafted a message that leaves traders hanging. The Fed clearly does not want to box itself into any position in September. I think the Board of Governors were careful not to give any hint for September because the members truly do not know what they will do. They don’t want to tighten too soon and be accused of stalling the recovery, but they don’t want to wait too long and be caught behind the curve.

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This seems like a lot of wasted angst to me. If the Fed raises rates, the funds rate will be all of 50 basis points. There is no reason to believe that rate could tip the United States backward. It would, however, take the obsession about the first rate increase off the table, and the Fed could be clear it has no plans to continue to raise rates on a Greenspan-like schedule. On the flip side, raising rates in September would give the Fed some cover should inflation start to move higher.

I see only upside from the Fed raising the funds rate in September. I understand the argument that a strong dollar hurts earnings, but is that really the Fed’s problem? Moreover, we only have to look back at the 1990s to see how the U.S. economy fared with a strong dollar. The best part of the first rate raise is that I won’t have to write about it any longer.

Read more from today’s commentary.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

July 30, 2015

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