Should the Fed Raise Rates? 5 Economists Are Divided
Economists have been arguing for months whether the Fed should or could raise interest rates. But with the crash of the Dow and the Chinese stock market, there are now doubts about whether a rate hike would do more damage to an already volatile market. As we await word from the Fed, Bisnow asked five economists to weigh in on the pending decision.
Robert Bach, Director of Research – Americas, Newmark Grubb Knight Frank
"The Fed should raise rates at their meeting this week. The Fed’s two mandates are maximum employment and stable prices. The labor market looks solid, and with slack disappearing, higher inflation could be around the corner. As an added bonus, raising rates could forestall 'irrational exuberance' in commercial real estate and other bubble-prone corners of the financial markets. The Fed needs to act because their recession-fighting arsenal is depleted. In order to lower interest rates when the next recession comes, they have to raise rates soon. A rate increase probably will unleash some financial market volatility, but it could also be viewed as reassurance that the Fed thinks the domestic economy is strong enough to pedal without training wheels. Having said that, I suspect they will postpone 'liftoff' until their October or December meetings."
Rajeev Dhawan, Director of Economic Forecasting Center at J. Mack Robinson College of Business, Georgia State University
"The Fed has been announcing a hike from the rooftops since July! So the market has been preparing for this hike and I think the market would be disappointed if the Fed didn’t move. But with the global stock markets in turmoil, combined with the uncertainty of a debt ceiling resolution and fiscal policy, I think the Fed should wait until October or even later. To put it simply, we don’t know how the DC politicians are going to handle the new budget and the looming debt ceiling, and the next 15 to 20 days are crucial as to how they act upon these pressing issues. With this much uncertainty, the Fed should buy insurance by waiting."
George Ratiu, Director, Quantitative & Commercial Research, National Association of Realtors
"I believe that a rate hike in the current environment would be timely, so I would say I am in favor of it. The Fed has said that they are monitoring two main economic indicators as part of their dual mandate—unemployment and inflation. The unemployment rate has dropped below the Fed's stated threshold. While the consumer price index—a main measure of inflation—has not moved past 2% recently, the shelter components—rent and owners’ equivalent rent—have been accelerating, with growth at or above 3% year-over-year. With stable overall economic conditions and given the Fed’s own forward guidance policy, the markets have been anticipating a hike and have already capitalized it. In fact, since the Fed has been ramping expectations about a small hike for most of this year, I think a delay would muddy the waters and just postpone the inevitable. So the real question is how much the hike would be. A .25% rate has already been capitalized and would not surprise the markets, while .5% would signal stronger confidence at the Fed about market conditions."
Ray Torto, Harvard Lecturer, Retired Global Chief Economist at CBRE
"I would argue that the Fed should not delay what everybody is expecting and have been expecting for quite a while. The US economy is strong and a short-term interest rate increase will not derail the US or global economy. Now is the best time for a decision and there is no perfect time. Those arguing for a delay now will find another reason at the next decision moment for further delay. However, after the first increase the discussion will then jump to when will come another and by how much…"
Victor Calanog, Chief Economist, Reis
"The Fed has to carefully balance credibility for forward guidance and how they adapt to changing market conditions. Much like their decision to end QE last year, the process of communicating an interest rate hike to domestic and global markets has been consistent and calculated. Financial market volatility and general global economic softness have other institutions arguing for a delay, but the Fed has to diligently consider what that might mean for policy and guidance in the future—will markets trust their ability to follow through if they delay now, after banging the drum for several months? My bet is a token increase of anywhere from 15 to 25 basis points, small enough to not rattle the markets but still a non-zero figure to maintain credibility."