June 15, 2016
There have been several pieces in the media complaining that the Fed is having a hard time raising interest rates from their current unusually low level. This is true, but the basic story here is quite simple: the economy remains very weak.
The growth rate has averaged just 2.0 percent for the last five years and may well fall below that pace in 2016. That is not an environment in which it makes sense for the Fed to be raising interest rates.
The recent news reports make it sound like the problem is that the Fed can’t raise interest rates, as though this is a goal in itself. The real point is that we should want to see a strong economy in which it might be necessary for the Fed to raise interest rates to prevent overheating. The fact that the economy is not stronger means that people are unable to get jobs, or full-time jobs, or jobs that fully utlilize their skills.
It also means that we are foregoing an enormous amount of potential output. We could be devoting resources to the spread of clean energy, educating our kids, or providing better health care. But because there is not enough demand in the economy, resources just sit idle.
This is a real and huge problem. The fact that the Fed can’t raise interest rates? Sorry, not in the same ballpark.
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