Opinion: Take a deep breath — the Fed’s interest-rate path will be just fine
https://www.marketwatch.com/story/take-a-deep-breath-the-feds-interest-rate-path-will-be-just-fine-2018-12-20
Published: Dec 20, 2018 6:38 p.m. ET
Chairman Jerome Powell clears a reasonable way forward for the central bank and the U.S. economy
BloombergThe Federal Reserve’s decision to raise its benchmark federal funds rate to a range of 2.25% to 2.5% on Wednesday and projections for up to two increases in 2019 are already prompting deep concern. But these fears are vastly overblown.
Despite growing talk of an impending recession, the American economy continues to hum along nicely under President Trump. While the Atlanta Fed’s most recent projection suggests 2.9% GDP growth for the fourth quarter — less than the 3.5% rate of the third quarter — the economy, as Federal Reserve Chairman Jerome Powell put it Wednesday, is “very healthy.”
Unemployment remains at historic lows of 3.7%, and payrolls already surpassed 2017’s total gains at the end of November. Moreover, the Labor Department’s monthly JOLTS report consistently demonstrates that there are nearly one million more job openings than workers in the workforce currently seeking employment. There’s still room for the labor force participation rate to go up among prime-age workers, but we have a vigorous job market.
The bottom line is positive for today’s U.S. economy, and a recession hardly seems imminent. Still, concerns about the challenges that could help to slow the progress are justified.
The economy’s headwinds
Few doubt that the American and global economies are facing meaningful headwinds as we begin our descent from 2018 and prepare to ascend into 2019. Four primary threats seem to stand out most: the likelihood that President Trump’s trade war with China will go beyond the 90-day negotiation window, the erosion of last year’s “synchronized global growth” buzzword, rising inflation and more interest rate increases.
The prospect that the trade war between the world’s two largest economies will worsen, stunt U.S. production output and start taking a bite out of consumers’ pockets is a legitimate concern. History proves that trading tariff barbs hurts both sides in the short run and can severely stunt economic growth in the long term.
Furthermore, Chinese President Xi Jinping just declared intentions to “stay the course” for economic reforms, and the country’s recent shot across the bow at Apple AAPL, +0.43% reveals that they have many more weapons available than we think. Finally, anyone who thinks the global economy — including the U.S. — is immune to China’s economic hardships is fooling themselves.
The Fed’s real significance
Conversely, worries about raising rates are tremendously overstated. As I have been arguing, we will survive a December rate hike and at least two more next year. Think about it this way: The federal funds rate is currently in a target range of 2.25% to 2.50%. The last time it was this low was more than 10 years ago — when the Fed cut from a range of 3.00% to 3.25% on March 18, 2008. It wasn’t long after that rates effectively hit zero — for seven years.
Moreover, no one should exaggerate the influence of Fed policy on the economy. If low rates really were the be-all and end-all of economic growth, why are growth expectations for the European Union so low despite negative benchmark rates since 2014? How about Japan? Shouldn’t credit be flowing and their economies growing by now, if the big boon is to cut rates and the big devastation is to raise them now?
It is worth noting Chairman Powell’s indication that there is “a fairly high degree of uncertainty about both the path and the destination of any further increases.” Thus, if growth slows and unemployment rises, the Fed could and would alter its trajectory. Hence, future rate increases will rightly be “data-dependent.” Nothing is set in stone.
For now, if ever there is a time to end the decade-long Era of Accommodation and return to, say, only 3.0%, it’s 2019. Even that is historically low and maybe not actually “neutral.” More importantly, today’s strong economy can handle a couple more quarter-point bumps — spaced out at least quarterly.
And if you’re a monetary-policy fan who thinks the Fed should cut rates to combat recession, then you should want them to normalize so the Fed will be better-equipped for rate cuts during the next recession. We’re not talking about bringing back a 10% federal funds rate here, by the way. No need — lest we forget that the rate was effectively zero for seven years.
Investors should breathe deeply about the Fed. We’ve endured double-digit rates before. We can survive a 3.0% federal funds rate in this economy. The trade war, however, may be a different story.
Jimmy Sengenberger is the host of “Business for Breakfast” on KDMT 1690 AM in Denver. He is also CEO of the Millennial Policy Center, a public-policy think tank. He can be reached at Jimmy@SengCenter.com.
