As the Federal Reserve prepares for its meeting next week, economists are divided as to whether it should begin raising interest rates then or hold off until later.
Former Treasury Secretary Larry Summers, now a Harvard professor, thinks the central bank should wait. He offers several reasons why.
- "First, markets have already done the work of tightening," he writes in The Washington Post, referring to the stock market's drop and the bond market's volatility. "Financial conditions, as measured by Goldman Sachs or the Chicago Fed index, have tightened in the last two weeks by the impact equivalent of more than a 0.25-percentage-point increase in interest rates," Summers says.
- "Second, the data flow suggests a slowing in the U.S. and global economies and reduced inflationary pressures." The Atlanta Fed's forecasting model puts third-quarter U.S. growth at only 1.5 percent. And consumer prices have risen just 0.2 percent in the 12 months through July.
The Fed has kept short-term interest rates at record lows near zero since December 2008.
David Stockman, White House budget director under President Reagan, disagrees with Summers, arguing it's well past time for the Fed to start boosting rates.
He notes that the unemployment rate registered 5.1 percent in August, the lowest in seven year years and in the lowest quintile over the last 45 years. The 5 percent level is considered full employment by many economists.
"We are effectively in the end zone, and these clowns are sitting there debating whether or not we can let the rate go above zero," Stockman told Bloomberg TV.
The Fed has kept its target for the federal funds rate at a record low of zero to 0.25 percent since December 2008. Central bank officials have indicated that they are likely to begin raising the rate this year.
"What we need is to get a central bank under control that allows Wall Street to discover prices based on supply and demand," Stockman says.
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