What If The Fed Doesn’t Raise Rates?

We’ve gotten it into our heads that Fed Chair Janet Yellen is on her way down from the mountain top carrying stone tablets etched with the details of a rate hike. We don’t know exactly what form it will take, but let there be no doubt – the financial gods have spoken, so a rate hike there will be!

But it’s not that simple.

The Federal Open Market Committee (FOMC) is the group that determines monetary policy. This group must reach a consensus on policy changes before anything new can happen.

At the last meeting, the vote to keep rates the same was 9-to-1, with St. Louis Fed President Lacker dissenting.

In the vote to raise rates this week, it is possible that both Federal Reserve Board Governor Daniel Tarullo and Chicago Fed President Charles Evans will vote to keep rates where they are, making the tally 8-to-2 in favor of higher rates.

It’s still a consensus, but not unanimous. But what if the vote is closer, or even – dare we say it – what if it doesn’t carry?

At this point, barring a catastrophic event (think terrorism on a big scale) in the U.S. or Europe, or perhaps a terrible development in the Middle East, the Fed had better raise rates. If they don’t then they risk the one thing that keeps them in a job – credibility.

The Fed has many critics, including me. I don’t agree with some of their biggest policy moves, such as printing $4 trillion new dollars and holding real interest rates below zero for years.

I think their efforts have slowed the recovery in the U.S. and put a financial straitjacket on investors who deserve to be paid for putting their money at risk in fixed income.

But the Fed also has many supporters who rightly point out that our economy so far has not fallen off a cliff because of these interventions. They also note inflation has not run rampant (I’ll leave aside the $2.9 trillion in excess reserves here, as I’ve discussed that elsewhere).