That's the question I've been asking myself for some time now. After yesterday's GDP report, in which second quarter growth came out at the low end of expectations, at 2.3 percent, following the first quarter's tepid rate of just 0.6 percent, it can't be that the economy is overheating, right? And inflation, with the core rate running at only 1.8 percent, is still below the Fed's general 2 percent target. So what gives? Why the drumbeat for a rate hike? Given the anemic recovery and low inflation, if rates were at, say, 3 percent, wouldn't everybody be talking about a rate cut?
Yesterday, Barry Ritholtz had a piece in Bloomberg, "Pay Attention, Ignore the Fed," in which he argued that "After almost seven years, the beginning of the end of ultralow rates is here." Ritholtz maintains that employment is "robust" (arguable, if you ask me), while conceding that "even those who have been forecasting modest inflation have been wrong." And while the stock market, the economy and the financial system appear healthy, he notes that GDP, prices, home ownership, Europe and China are all cause for concern. Still, he writes (my emphasis):
On balance, the data remain far stronger than anyone in the midst of the financial crisis would have imagined at this point. And many key economic indicators are stronger than the Fed had earlier suggested would be the threshold for ending its zero-interest-rate policy.
Is that right? The recovery is "far stronger" than anyone "would have imagined" almost seven years after the financial crisis? Really?
You can parse each utterance of every Fed governor, or you can look at the data. I prefer the latter -- and it tells me interest-rate normalization will start before Christmas.
I like that word: normalization. Mr. Ritholtz told me, via Twitter, that 0.0 percent interest rates "ain't normal." What, exactly, I wondered, would "normal" interest rates be with the economy in the shape it's in? Two percent? Three percent? Higher? Lower? And who cares what's "normal," anyway? Shouldn't we be more focused on what's appropriate?
I asked Mr. Ritholtz if the economy was really overheating. His reply:
At 0%, that's the wrong question. Should be "Are we still in an emergency that requires emergency rates?"
When I opined that "Raising rates here just sounds like balancing the budget in 1937: asking for trouble," Mr. Ritholtz directed me to another piece, "More Millennials Living With Family Despite Improved Job Market." From the article (again, my emphasis):
In spite of these positive economic trends and the growth in the 18- to 34-year-old population, there has been no uptick in the number of young adults establishing their own households. In fact, the number of young adults heading their own households is no higher in 2015 (25 million) than it was before the recession began in 2007 (25.2 million). This may have important consequences for the nation’s housing market recovery, as the growing young adult population has not fueled demand for housing units and the furnishings, telecom and cable installations and other ancillary purchases that accompany newly formed households.
And I thought, is this supposed to support his argument, or mine?
Sorry, but I just don't see any reason to take away the punch bowl at this time. Am I missing something?