It’s the week of the December Federal Open Market Committee meeting, and there’s one important question up for debate: Will the Federal Reserve raise interest rates?
It’ll be the most important economic decision since the financial crash in 2008. And some are worried that it could also be a huge mistake.
On Dec. 16, 2008, the Fed put its benchmark interest rate close to zero as a way to bolster a struggling economy stuck in a financial crisis. But for months now, officials have said they might raise rates by the end of 2015, and that change could take effect as early as this week. Their thinking is that the economy is finally healthy enough that borrowing costs should return to more “standard” levels (meaning the country virtually no longer needs free money) to help future inflation from accelerating too much.
But while the economy has rebounded, certain aspects of the recovery—like the housing sector, work force participation and hourly wages—have failed to fully bounce back. This brings a few challenges: Raising interest rates could prompt markets to fall into a state of panic, leading to slower economic recovery and making it harder for workers to press for higher wages. For borrowers, it could mean having to pay more money for a house or a car.
“With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the U.S. stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence. The Fed does not have to do the job,” said Lawrence H. Summers, former Treasury secretary, in The Financial Times. “At this moment of fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results.”
Others believe a rate rise is overdue and that the decision needs to happen sooner rather than later.
“Some might argue that as long as inflation is close to 2 percent, we have a free pass—we can keep supporting the real side of the economy with low rates until inflation rises,” said Jeffrey M. Lacker, a member of the Federal Open Market Committee, in The New York Times. “But if the real side of the economy calls for a higher interest rate, then there is a real danger associated with this strategy. Inflation is a lagging indicator, and the forces that lead to rising inflation can build up before they are apparent in the data.”
Fed policymakers have signaled that they’re likely to raise their benchmark rate by a quarter of a percentage point, bringing it closer to their two percent goal. If the interest rate increase is passed this week, it’ll be the first time since 2006.