WASHINGTON: People used to say the Federal Reserve had to raise rates to fight nonexistent inflation. Then they said the Federal Reserve had to raise rates to fight nonexistent bubbles. And now they say the Federal Reserve has to raise rates for nonexistent reasons. Just, you know, to show that it can.

This is not progress.

What is, though, are all the jobs the economy has been adding. That has been an average of 243,000 a month for the past 12 months, which has been enough to drive unemployment down, as reported Friday, to 5.1 per cent. Now, that sure looks like a return to economic normalcy, so shouldn’t the Fed return us to normalcy by increasing interest rates 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 that the economy is anything other than properly heated. Workers still aren’t getting bigger pay raises — 2pc a year, compared with the 3.5 to 4pc they normally would — and inflation is still dead at 0.3pc. That picture doesn’t change even if you strip out volatile food and energy prices, with core inflation at 1.2pc 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, as it has said it might.

But some people are tired of this debate. The Fed hinted that it might raise rates now, and, by golly, that’s what some people want it to do, whether or not the data support it. “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 they have been wrong. 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 isn’t strong. The rationale keeps changing, but the conclusion doesn’t. 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.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, September 6th, 2015

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