Fed Should Set A Schedule To Raise Interest Rates And Stick To It!

The Fed should start raising interest rates again but only very gradually and according to a pre-set schedule.

After a disappointing first half, second half GDP growth will likely exceed 2.5 percent.

With job security and household balance sheets improved, consumer spending is robust but business investment has been weak—significantly owing to lower oil prices and drilling activity.

After falling to below $30 a barrel in January, oil has traded in the $40s since mid-April, and the number of drilling rigs has been steadily rising since mid-May. Apparently, shale producers can earn profits on new wells at these prices, and the oil patch won’t slow down growth in business investment going forward.

Also, the downdraft to inflation caused by falling oil prices—at the gas pump and for energy sensitive items like air fares—is essentially over.

Over the last twelve months, consumer prices—net of the volatile energy and food sectors—are up 2.2 percent. Going forward, headline inflation will be close to the Fed target of 2 percent, and that should be enough to start it worrying about too much inflation as opposed to not enough.

Further, with the target federal funds rate set at 0.25 to 0.50 percent, the Fed simply does not have enough room to cut rates should another recession threaten.

Overall, now is the time to start moving up interest rates—but not too much and not too quickly.

Labor markets are tighter but full employment is in the eye of the beholder.

The ratio of job seekers to job openings has finally fallen to pre-financial crisis levels—about 1.3. Retailers staffing for the holiday season are offering higher wages than last year. However, labor force participation among men between ages 25 to 54 remains alarming low—nearly 7 million are neither working nor looking for work.

Given the plethora of new benefits the Obama Administration has rolled out for them, it may take dynamite to get them off their couches. However, the Fed should not assume the economy is at full employment and these men can’t be lured back into productive lives with higher wages.