Federal Reserve Faces Fork In The Road Over Interest Rates

Federal Reserve Faces Fork In The Road Over Interest Rates

5:47am Sep 16, 2015

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The Federal Reserve takes up an important question for the U.S. economy tomorrow when it begins meetings. Should it raise interest rates? The Fed is getting a lot of advice. The World Bank warns against it, and some prominent economists say a rate increase now would be catastrophic. Another camp of experts and central bankers is telling the Fed exactly the opposite. Here's NPR's Chris Arnold.

CHRIS ARNOLD, BYLINE: The last time the Fed started raising interest rates, it was 11 years ago. Back then, Lehman Brothers was doing great. Lance Armstrong was a hero, and Donald Trump, well, he was just starting to fire people on his new reality TV show.


DONALD TRUMP: Guys, they killed you. They really gave you a good beating. You're going to be seeing the boardroom where somebody has to get fired.

ARNOLD: Then, of course, the real financial crisis hit, and in response, the Fed dropped interest rates lower than it ever has in history. And they've stayed there for years. So what exactly did that do for us? It did a lot, says former U.S. treasury secretary Larry Summers.

LARRY SUMMERS: Without low rates, more companies would have failed 'cause they couldn't service their debts. More households would've gone bankrupt, and large financial institutions would have been at greater risk of failure.

ARNOLD: In other words...

SUMMERS: Likely, we would've had a depression.

ARNOLD: But the question now is, has the time come to start raising rates again? If you wait too long to raise rates, you risk inflation, asset bubbles and other problems. The U.S. economy has been recovering. We've gained back 13 million jobs. But Summers says no, not yet. Wages are still stagnant. The global economy appears to be in more trouble than we thought just a few months ago.

SUMMERS: Raising rates is hitting the brakes on the American economy. It's not the moment to raise rates.

ARNOLD: So Summers says the Fed faces a fork in the road, but he says one path is a lot more perilous than the other. He says there's more room to maneuver if the Fed chooses the path of not raising rates yet.

SUMMERS: If the economy were to overheat, we have plenty of room to raise interest rates and slow it down.

ARNOLD: But we don't have room in the other direction - that is, to drop rates lower 'cause they're already at rock-bottom. So the other path - if we start raising rates a bit and hit the brakes on the economy - Summers says that could be inviting big trouble.

SUMMERS: Because there's very little in the fuel tank to use as stimulus. And so if we slow the economy down, we could have tipped off a dynamic that takes us towards recession and lower incomes.

ARNOLD: OK, all that sounds really bad. So why would the Fed even consider raising rates now? William Dunkelberg is the chief economist for the National Federation of Independent Business. He says, sure, there's a camp of economists, including Summers, who want to keep rates low just in case. But...

WILLIAM DUNKELBERG: Then you've got another set of people who say this is insane; none of this is real.

ARNOLD: Dunkelberg is in that camp. He says this years-long intervention to keep rates low is unnatural and it's already causing problems. He says millions of retirees can't make any money on super-safe investments like treasuries and bank CDs, and he thinks that the Fed moving to raise rates now would be a show of confidence for the U.S. economy. He thinks that would encourage the business owners that he represents.

DUNKELBERG: If we actually saw them move ahead, we would say, OK, finally, we have the green light from the Fed; they know everything, and we can go ahead and risk more and spend more. And that would help the economy, not hurt it.

ARNOLD: We'll find out what the Fed will do after its meeting wraps up on Thursday. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

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