Why the Economy Is Not Ready for an Interest Rate Increase
By THE EDITORIAL BOARDAUG. 1, 2015
Inside
The Federal Reserve talked up the economy last Wednesday, in a statement that emphasized improvements in employment, housing and consumer spending. Unfortunately, the optimism is misplaced.
On Thursday, the Commerce Department reported that from April through June, the economy grew at an annual rate of 2.3 percent — a modest pace, especially given the expectation of a bigger rebound from weather-related poor growth in the first quarter.
In 2014, for instance, when bad weather also reduced first-quarter growth, the economy grew at an annual pace well above 4 percent for the next two quarters. In comparison, the economy’s recent performance is not a rebound but rather a resumption of the sluggish growth that has long characterized the economy.
Given the depth of the recession that preceded the current recovery, growth in the 2-percent range has not been enough to pull up wages. That point was driven home on Friday, when the Labor Department reported a slowdown in wages and benefits in the second quarter. In a healthy economy, a more or less steady drop in the unemployment rate — as has occurred in the United States — would translate into rising wages and higher prices.
If significant or sustained, such increases would be cause for the Fed to raise interest rates. But so far, no such increases have appeared, and, as a result, most working people have not yet recovered all of the lost ground from the recession or raised their living standards.
Fed policy makers know all that. A recent leak of documents from the Fed shows that its staff economists have forecast more of the same modest growth and inflation for years to come. Nonetheless, the Fed seems determined to raise interest rates before the end of this year. Fresh data between now and then may cause it to delay. And any move in interest rates, if it comes, is expected to be tiny.
But an increase, however small, would signal that Fed policy makers are basically satisfied with the economy’s performance. Coupled with Congress’s long failure to provide adequate fiscal support to the economy, that message would be a setback for Americans who are still not getting ahead.
In recent years, the Fed has generally been good at communicating the reasons for its actions. If it really intends to move ahead soon with interest-rate increases, it needs to explain how an economy in which wages are stagnating is as good as it gets.
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