News and Commentary

Fed May Delay Hiking Interest Rates

According to The Wall Street Journal, the rumors that the Federal Reserve would soon raise short-term interest rates are just that—rumors.

Just mentioning an interest-rate hike roils markets; the ripple effect of changing interest rates affects stock valuations, home buying and corporate investment, so the Fed is proceeding cautiously. Last Friday, stocks plunged as the markets thought a hike was imminent. But on Monday, when the hike seemed less certain, the Dow Jones Industrial Average rose 239.62 points to 18325.07.

There are disparate opinions as to whether the Fed should raise rates; J.P. Morgan Chase & Co. Chairman and CEO James Dimon opined, “Let’s just raise rates … You don’t want to be behind the eight ball on this one, and I think it’s time to raise rates,” arguing that a quarter-percentage-point increase would be a “drop in the bucket.”

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, differed, stating, “I don’t feel that we are incurring the costs of patience.” He was echoed by Fed governor Lael Brainard, who called for “prudence” in raising rates in Chicago on Monday, saying the Fed’s caution “has served us well.” Robert Kaplan, president of the Federal Reserve Bank of Dallas, added, “I would like to find a way for us to remove some amount of accommodation, but you can’t force it. You have to remind yourself it makes sense to be patient, because I don’t think the economy is overheating.”

The central bank will hold a Sept. 20-21 policy meeting with 16 officials before a decision is made. Because the jobless rate has dropped to 4.9%, some bankers want to raise rates, but others warn that the inflation rate has not dropped and the economy has grown so slowly that a hike in interest rates would pose a threat.

The Fed’s benchmark interest rate has only wavered between 0.25% and 0.5% since December. The Journal reports, “Officials began the year thinking they would nudge it up in four quarter-percentage-point increments this year, but have routinely deferred action amid uncertainty about a range of issues—including market volatility early in the year, soft jobs data in the spring and worries about the U.K.’s June vote to exit from the European Union.”

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