Going Head To Head: Here’s What Proponents and Opponentsof A September Rate Hike Are Saying

With the Federal Reserve’s September meeting just around the corner, the debate on what if the Fed should raise its benchmark rate this month is heating up. As it has always been, there is the pro-interest-rate-hike group, albeit an unofficial group and there is the group that’s against the notion of a hiking the benchmark interest rate.

As we prepare for what would be an interesting Fed meeting, here is what proponents and opponents of an interest rate hike are saying.

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What proponents are saying

Starting with Federal Reserve insiders, Boston Fed president, Eric Rosengren, believes that it’s time for the Fed to consider changing its monetary policy. He advocates a gradual tightening of the monetary policy. The US government should focus more on the US economy and not the global economic weakness when it makes its decision. If the government ignores the improving strength of the US economy for too long, it risks over heating the economy, according to Rosengren.

Rosengren had previously cited rising commercial property prices as another reason to raise benchmark rate. In addition, there are worries concerning how low rates are making it easy for folks and businesses to get a loan for cheaper, thereby, encouraging higher spending vs. investing. 

And his opinion echoes the words of Federal Resave Chairwoman, Janet Yellen. Being the head, who is required to stay objective, Ms. Yellen isn’t necessarily a proponent of a rate hike. However, she said just before August closed that the case for hiking the rate has strengthened. At the minimum, this shows that she’d be very receptive of a rate hike proposition at the September meeting.

Now to the Wall Street. Investment consultant Brad Brooks wrote in Bloomberg Views that a rate hike would generate a minimum of one trillion dollars yearly for fix-income investors. He also believes this could mean a six percent rise in GDP. He suggests that the Fed raises benchmark rate by a quarter of a percentage in September and a 0.50 percent rate hike afterwards.

Bill Gross of Janus Global Unconstrained Bond Fund criticized the Fed manipulating the market for far too long, insisting that the Fed should raise the benchmark interest rate. He said, “Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield. $11 trillion of negative yielding bonds are not assets — they are liabilities.”

Gross believes that keeping interest rate new zero for such a long time puts the US economy at risk of getting stifled as well as allowing inflation.

What opponents are saying

Starting with Fed insider, New York Fed president William Dudley believes it is premature to raise benchmark rate. He cites three reasons to back his opinion. First, the US monetary policy is only accommodative on the moderate side of things, he said. Second, Dudley said the, “US financial conditions have been influenced by economic and financial market developments abroad.” In essence, with many economies abroad, China, for instance, currently having problems, Dudley thinks it might break the US economy to respond with a raise hike.

Third, Dudley said there are “risk management considerations” as well. He points to other weak economic indicators including the 1.2% annualized GDP growth in the second quarter as well as the declining productivity data.

Outside of the Fed, the UBS macro strategy team argues that the Fed shouldn’t raise rates unless the economy is significantly stronger, or at least not weaker, than the economic condition when it last hike rates. They UBS macro team put forward the chart below to compare what key indicators looked like two years ago, last year when rates were hiked and at present.

Going by the chart, folks at UBS believe a rate hike could be premature.

Former treasury secretary Larry Summers is also a big opponent of a rate hike. Summers argues that monetary policies should always try to avoid major surprises. He points to an historical trend in the Fed funds futures market to make case against a rate hike.

At the moment, the Fed funds futures market is signaling only a 28 percent chance that rates will be hided in September. Whereas, in the last two decades the Federal Reserve has never tightened its monetary policy without steering the Fed funds futures market to a minimum of 70 percent chance a monetary policy tightening is coming.

Summers also thinks that the US government should be willing to exceed its two percent inflation rate mark in times of long-drawn-out economic recovery and low unemployment. Based on this, a rate hike should definitely not be in consideration in September, Summers wrote.