Later this afternoon, the Federal Reserve’s Open Market Committee will make an announcement of some consequence: to raise or hold. Sounds like high-stakes poker, but we’re talking fractions of a percentage point, not chips. That is, the committee is widely expected to raise the benchmark interest rate it controls by one-quarter of a percentage point, though there’s a nonzero chance it will hold rates where they are. (There’s virtually no chance it will lower rates.)
For a couple of reasons, the outcome of this Fed meeting has become a big deal. First, President Trump has been badgering the Fed’s chairman, Jerome H. Powell, to stop raising interest rates. Since presidents have, in recent decades, considered the independent Fed off limits, Trump’s calling it out got some attention at first, but by now its just another drop in the chaos bucket. What’s weird about this moment is that a lot of economic liberals agree with the president. As John Cassidy observed with his understated, British calm, “It isn’t often that Trump and [Paul] Krugman agree on anything.”
What could possibly motivate Trump and progressive economists to be on a similar page? For Trump, it’s that Fed rate hikes are intended to slow the growth rate down a bit to stave off inflationary pressures (put aside for the moment whether such pressures actually exist). Also, Trump doesn’t like the fact that the dollar gets stronger when our interest rates rise relative to those of our trading partners, as this makes imports cheaper and our exports more expensive, thus worsening the trade balance.
For progressives, unnecessary rate hikes cut against the fact that the benefits of the long U.S. expansion are now starting to reach people who depend on paychecks, not portfolios. The inconvenient fact about the economic cycle is that the least advantaged are the first to get slammed by the recession and the last to get lifted by the recovery. Thus, from the perspective of working families, the longer and stronger the recovery, the better chance they have of getting a piece of it. Also, as noted, even at very low unemployment, inflation is tame, meaning that by that most important monetary-policy metric, there’s no sign of economic overheating.
A final argument for pausing is that some other stuff is happening that’s doing the Fed’s work for it, i.e., slowing down the economy before it gets too hot. While falling stock prices aren’t a particularly big concern of the Fed — it targets “real” variables, such as growth, jobs, wages and prices — worsening financial conditions can affect the real economy, so it can’t ignore them. For the record, I don’t see much negative spillover from the ongoing sell-off, but the Fed’s got to try to see around corners. There’s also slower growth in Europe and China, the prospect of fading fiscal stimulus later next year, and the growth-slowing impact of higher rates on interest-sensitive sectors, such as housing and cars.
Trump made all these points in a tweet earlier this week. Is he right, then, that the Fed will be making a mistake if it hikes later Wednesday?
I don’t think so. Not because I disagree with the progressive benefits of holding rates steady, but because this hike is thoroughly “priced-in.” It’s consistent with Powell’s speeches about the strength of the current economy. Those whose economic decisions are moved by small rate changes like this have already built this hike into their plans, which won’t change regardless of what the Fed decides today. To be clear, I won’t object at all if it pauses, but I don’t see a reason for surprising everyone, and think that tactic — a powerful one, actually — should be used sparingly.
In this sense, “will they or won’t they?” (raise rates today) isn’t the right question. What’s much more important is that it changes its “forward guidance,” that part of its messaging where the Fed signals its plans to us Fed-watchers. This would involve slightly downgrading its assessment of the current economy, say from “strong” to “solid” in the post-meeting statement (such nuances matter in the reading of Fed entrails). It would most importantly call for signaling that there’s a decent chance that the steady plod of the rate-hike campaign could be interrupted in 2019, conditional on the data. Following the meeting, in forthcoming speeches, it should focus more on the cause for the pause. In other words, eschew the surprise tomorrow in exchange for updated forward guidance.
From the perspective of the millions of working families whose economic opportunities are dependent on the job market staying at least as tight as it has been, the worst outcome Wednesday won’t be a rate hike. It would be a rate hike accompanied by a business-as-usual statement, a statement that implicitly said, “We’re just going to keep raising rates as if conditions haven’t softened and inflation is rising a lot faster than it is.”
In mere hours — at 2 p.m. — we’ll see how this plays out.