STATEMENT: CAP Economist Michael Madowitz Reacts to Fed Decision to Keep Interest Rates at Zero
Washington, D.C. — Michael Madowitz, Economist at the Center for American Progress, released the following statement today after the Federal Reserve announced its intent to hold off on raising interest rates. The announcement arrives after the Federal Open Market Committee, or FOMC, met this week in Washington.
Falling oil prices and continued slack in the labor market—both of which are good news for the U.S. economy in the long run—have eased calls for a rate hike. More importantly, we have yet to see inflation numbers that make a rate increase from the Fed seem like good policy. With today’s announcement that it plans to hold off on raising interest rates, thankfully, the Fed appears to concur.
Raising rates now—with the economy signaling that it can put more people to work and grow faster and showing no signs of inflation—would mean leaving gross domestic product gains on the table. It’s important for the Fed to maintain its credible commitment to its stated 2 percent inflation target, and given current and projected data, the best way to do that is to hold off on rate hikes until the data better fit that policy, a welcome position that more FOMC members have advocated for since the committee’s last meeting.
Micromanaging the economy via small changes in interest rates should not be the Fed’s goal, and in the event of a serious economic crisis or another downturn, a 25-basis-point rate hike is not a big enough insurance policy. It is essential that the Fed be ready to respond to bad economic news—as well as the good—robustly. A slightly higher Fed funds rate does not provide that margin, and Fed policy appears to have recognized this false comfort for what it is.