Why Would the Fed Raise Interest Rates?

Why would the Federal Reserve raise interest rates now?  The worry from economists and politicians — especially conservative politicians — is that the low interest rates will push up inflation.  However inflation has been low and actually falling, it is well below the (seemingly arbitrary) 2% target rate.  In fact it is below 1%.

At the same time policy makers and politicians complain about high unemployment, which I think is probably valid especially when underemployment is taken into account.  But the latest number here has unemployment below 6%.  When I was in school, 6% was regarded as the so-called “natural rate” of unemployment.  Falling below the natural rate — theoretically, anyway — is supposed to be inflationary, but we see no immediate risk of inflation.

The fact that interest rates are low and inflation is low and unemployment is low all at the same time seems to contradict decades of conventional wisdom about interest rates, inflation, and unemployment.  You also have to keep in mind that the deficit is down as is government spending.

This seems to leave a valid solution to moving money and pumping up growth:  More government spending.  Because, while unemployment is falling, wage growth is falling with it.  That lack of wage growth is countering any risk of inflation, is it not?  And with lower wages and a shrinking middle class, consumer spending — i.e., demand — is down.  Without demand the people we call job creators have no incentive to expand.  Of course this argument rings hollow with supply-siders, regardless of the empirical evidence suggesting otherwise, but let’s muse on…

Perhaps a smart opportunity for some public sector spending has presented itself.  Certainly we need it.  Transportation, schools, energy…we’ve neglected it all to the point of ruin.  The investment can be justified and it would do more for the economy than monetary policy has been able to accomplish to date.  Maybe even some progressive tax adjustments could help get it done and keep us out of the red.  Power up the economy while doing good work for everyone.  Doesn’t that sound like a good idea?

Unfortunately we appear to be fixed on old theories that don’t pan out in practice.  Kinda makes you wonder who’s in charge.  And why.


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