This is not progress.
What is, though, are all the jobs the economy has been adding. That's been an average of 243,000 a month for the last 12, which has been enough to drive unemployment down, as reported Friday, to 5.1 percent. Now, that sure looks like a return to economic normalcy, so shouldn't the Fed return us to interest rate normalcy by increasing them from zero? Maybe. The Fed, after all, doesn't want to wait until the economy is obviously overheating to start raising rates, but rather right before it does so.
The only problem with that is there aren't any signs the economy is anything other than properly heated right now. Workers still aren't getting bigger raises, just 2 percent a year compared to the 3.5 to 4 percent they normally would, and inflation is still dead at just 0.3 percent. That picture doesn't change even if you strip out volatile food and energy prices, with so-called core inflation at only 1.2 percent, and not even trending up. Given that raising rates too early would hurt more than raising them too late—more unemployment we don't want would be worse than more inflation we do—and it's hard to see why the Fed should do so this September, like it's said it might.
But some people are tired of this debate. The Fed hinted it might raise rates now, and, by golly, that's what they want it to do, whether or not the data actually support that. "What are you worrying about, September or December," former Fed governor Laurence Meyer wondered, when "it doesn't matter" and the Fed should "just pull the trigger." Economist Tyler Cowen said he "would consider a 'dare' quarter point increase just to show the world that zero short rates are not considered necessary for prosperity and stability." And New York Times columnist William Cohan implored the Fed to "show some spine" and start hiking despite the sell-off.
These are psychological arguments, not economic ones. Hawks, in other words, have given up trying to justify their calls for higher interest rates with warnings about incipient inflation or bubbles. They tried that for years, and have been wrong for years. So now it's about showing markets that not only is the Fed "tough," but also that it thinks the economy is tough enough to handle higher rates, even if the economic case for them isn't that strong. The rationale keeps changing, but the conclusion doesn't. No matter what, even if the dollar is up, inflation is down, and wages aren't rising, it's a good time to raise rates.
Just don't ask them why.