The Fed guessing game

All eyes are now on Federal Reserve chairwoman Janet Yellen

Janet Yellen
(Image credit: BRENDAN SMIALOWSKI/AFP/Getty Images)

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All eyes are now on Federal Reserve chairwoman Janet Yellen, said Binyamin Appelbaum at The New York Times. Since December 2008, the central bank has held short-term interest rates near 0 percent, an unprecedented stretch meant to pull the U.S. economy from the depths of the Great Recession. But the end of this cheap-money era appears to be near. With the economy steadily improving, the Fed plans to raise its benchmark interest rate by 0.25 percent, perhaps as soon as its mid-September meeting. It's "a mathematically minor move that has become a very big deal." Liberals want to keep rates low to boost growth and fight economic inequality; conservatives say it's long past time to rip off the Band-Aid of federal stimulus. Everyone's worried about how the skittish global markets will react.

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These are all "weak reasons" that overlook a central fact, said Barry Ritholtz at Bloomberg​ View. "Interest rates at zero are a post-credit-crisis emergency setting, and the emergency is over." The economy posted surprisingly strong 3.7 percent growth last quarter. And the truth is, "banks can handle the increase." The Fed also needs to stop delaying sound fiscal policy every time Wall Street throws a tantrum, said William Cohan at The New York Times. Whenever the central bank signals that it plans to raise rates, markets swoon, as traders "ponder the fact that the morphine drip of free money might be pulled out of their arms." A version of this "tragicomedy" is now playing out in the markets, and Wall Street is begging for another postponement of the inevitable. But it's time to "end the easy-money addiction" once and for all.

Given the "extraordinarily gradual approach" Fed leaders have promised to take to hiking rates, "it's a wonder they have not raised rates already," said Chris Low at BBC. After all, the unemployment rate, perhaps the most important factor in their decision, was 5.3 percent in July, very close to the 5 to 5.25 percent range considered to be full employment. Ultimately, "it is worth remembering the Fed has history on its side": Financial markets almost always panic after a first rate increase, but calm down when investors see the economy can handle it. "There is no reason it should be different this time."

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