From The Wall Street Journal:
Fed Chairwoman Janet Yellen tells Congress the economy is making ‘very good progress’ amid some of the best government data in decades on housing, jobless claims and inflation
By Kate Davidson | Updated Nov. 17, 2016 9:57 p.m. ET
The U.S. dollar steamed to a level not seen since 2003 and yields on the 10-year Treasury note reached a high for the year Thursday, as Federal Reserve Chairwoman Janet Yellen confirmed investors’ view that the U.S. economy is strong enough to withstand an interest-rate rise soon.
Ms. Yellen told lawmakers in testimony Thursday that the Fed could move “relatively soon,” after the government released a grab bag of economic data all pointing to a stronger economy: an improving housing market, rising consumer prices and a more robust labor market.
“At this stage, I do think that the economy is making very good progress toward our goals, and that the judgment the [Fed policy] committee reached in November still pertains,” she told Congress’s Joint Economic Committee.
Her comments bolstered expectations that the Fed will lift its benchmark federal-funds rate at its next meeting on Dec. 13-14.
Ms. Yellen said the results of the U.S. presidential election hadn’t altered the central bank’s assessment, following its meeting earlier this month, that the case for a rate increase had grown. And Thursday’s data suggest President-elect Donald Trump is poised to take office in January at the helm of an economy that is gathering pace.
There’s more at the original, but I find the case for increasing interest rates ridiculous. The Congressional Budget Office projects real Gross Domestic Product growth of just 2.0% for the fourth quarter of this year over Q4 for 2016, and to average just 2.0% per year for the next ten years. The Federal Reserve’s own estimate, published in September, downgraded it’s estimate for real GDP growth for 2016 from 2.0% (the July estimate) to 1.8%. Dr Yellen:
warned that holding off on a rate increase for too long could force the Fed to raise rates relatively abruptly in the future to keep the economy from overheating. But she said the near-term risk of “falling behind the curve” soon is limited, and reiterated that the bank expects to raise rates gradually over the next few years.
Overheating? Since when is real growth around 2.0% “overheating?” With the U-6 unemployment rate standing at 9.5%,1 we are nowhere close to full labor utilization — I do not accept the official U-3 unemployment numbers as realistic, and, as we noted previously, the public don’t seem to either — and new business start-ups are still depressed:
- The Start Up Activity Index rose to 0.38 in 2016 — continuing an upward trend started in 2015. After falling with the recession and reaching its lowest
point in the last twenty years just two years ago, startup activity rebounded, going up for the second year in a row.
- Despite the recent positive trend, startup activity is still below the levels seen before the Great Recession drop, and startups with employees are still on a long term decline compared to historical levels — from the 1970s to now.
Economic overheating just doesn’t seem to be much of a concern to me at the moment.
There were some supposedly hopeful signs for the economy in October:
- Consumer Prices Rose for Third Straight Month in October
- Housing Starts Jumped 25.5% in October
- U.S. Jobless Claims Fall to Lowest Since 1973
But those were just October signs. October was also unusually warm through much of the United States, which could only help most businesses, and the data from just one month seem pretty insufficient on which to take judgements such as Dr Yellen has implied were taken. Dr Yellen noted, in February of last year, that the demand for small business credit was low, and that trend continued since then, into this year. Raising interest rates isn’t going to do anything to help encourage investment at a time when demand isn’t high enough anyway. If the demand for credit was higher, interest rates would be rising on their own, without any impetus from the Fed. That they aren’t2 tells you that the interest rates the Fed controls aren’t too low.
There is, of course, one downside: while Dr Yellen has said, repeatedly, that the Fed do not take politics into consideration,3 raising interest rates also means raising debt service costs for the federal government. Incoming President Trump’s stated plans call for increased deficit spending — something I have stated I oppose — and a rate increase will increase the costs of borrowing money. Dr Yellen is firing a waning shot for Donald Trump to hear.
There’s simply no reason to raise rates right now.
- This reference is updated monthly by the Bureau of Labor Statistics, and may not return the same number as I have given if searched after the December update. It was accurate at the time of writing this article. ↩
- There has been a quick spike in interest rates in reaction to Mr Trump’s unexpected victory in the presidential election, but that was only eleven days ago, and not enough to state that it is a continuing trend. ↩
- If you believe her, I’d like to talk to you about the purchase of a bridge. ↩