The Birds and the Bees of the Fed’s Rate Hike Debate

When Federal Open Market Committee members are loving low inflation, they make a rate hike. But it’s an important decision, and there are some facts we all need to know so we don’t get pressured into rate hikes before the economy is ready.

After yesterday’s Fed minutes release, it’s time we had an adult conversation about where the Federal Reserve’s interest rates come from and whether we’re ready to raise interest rates. We probably will soon, but we probably shouldn’t. It’s not cut and dried: economists have argued for decades that monetary policy operates with long and variable lags—that is, the Fed can’t just wait for inflation to hit a target, flip a switch, stabilize inflation, and have the economy move on from there. But an analysis of the actual economic conditions we’re looking at doesn’t suggest we should be raising rates anytime soon.

To understand what’s going on, it’s important to step inside the Fed’s monetary policy process. The Fed has economic benchmarks—for a while it has targeted a 2 percent inflation rate, a figure some experts think is too low—to ground its long-term policy, and actual changes in interest rates are set by the FOMC. But with inflation, core inflation and inflation expectations all well below the Fed’s stated two percent target, the overarching policy says the Fed should be at least as likely to cut rates as to raise them. To understand why Fed watchers say rates are going to rise soon, we need to talk about where FOMC members come from.

The above excerpt was original published in Morning Consult.