Many signs point to the Federal Reserve raising interest rates this week during its two-day Open Market Committee meeting. The last time rates were raised was nearly a decade ago; since then the Fed has pursued a policy of slashing rates and keeping them low in an effort to wrench the economy out of the Great Recession and promote greater growth and consumption. Now as economic indicators like low unemployment and increased consumer spending tick toward the positive, many economists are pointing to a limited rate hike as a way to move the economy towards normalcy after the volatility of the past decade.
But opponents of raising interest rates take a different look at the economic metrics. They see flat inflation and wage stagnation as signals that the economy still has a ways to go before needing a big shift in monetary policy. We talked to former Treasury Secretary and current Harvard economist Larry Summers about the Fed’s possible actions moving forward.
On what he thinks the Fed will do:
I would say that the Fed has no choice but to raise rates given the predicate that has been laid and the expectations that have been set….They decided to signal a rate increase in December and given that signal it is now appropriate to go through with it.
On the economic risk of a rate increase:
I think that we face a structural problem in monetary policy and that is when recession comes we lower interest rates by … three percentage points. And on anybody’s forecast it’s gonna be a long time before we’re gonna be in a position to reduce rates by three percentage points. So it seems to me the risk of the economy hitting the recession when monetary policy is not in a position to respond are much greater than they have been previously and therefore, we need to be very cautious about doing anything that would increase those risks. Now it would be absurd to say that a 25 basis points increase would tip the economy into recession, but I look at today’s American economy and I say this is not a moment to be hitting the brakes even gently.
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