Rating a Rise

If it ain't broke, don't fix it.

   Key members of the U.S. Federal Reserve Board meet this week to discuss the state of the economy and decide whether to boost a key interest rate as the economy recovers. And many economic journalists and financial analysts predict the Fed's Open Market Committee will do just that, by perhaps a quarter of a point.
   Investors no doubt will be happy with an increase in the cost of borrowing money, since their stock in financial institutions will bring higher yields. But higher interest rates can also bring higher costs of production, which means higher prices, and a higher cost of living even as wages and family income lag other increases.
   As it is, the Social Security Administration, relying on Department of Labor statistics, will not provide a cost of living increase to pensioners next month, since the data indicate that the cost of living did not rise over the past year.
   Meanwhile, other economies among America's major trading partners continue to struggle, so any attempt to brake the U.S. growth rate, lest it get too rapid, could well cause a skid in its own economic engine and bring more problems than it is meant to solve.
   Sounds complicated? It isn't, really. America's recovery from the Great Recession, which ended in 2008, has been quite slow, but steady, even as other nations struggled to stave off a double-dip recession. Applying the brakes too soon can easily bring a second dive in America.
   It has happened before, most notably in 1937. The Fed backed off from its support of the economy during the Great Depression, and the country immediately stumbled, not to regain solid footing for several more years, until the start of World War II.
   As noted here ten days ago, economic pundits have been predicting a boost in Fed-controlled interest rates for months, saying that as the economy becomes stronger, there will be less need for the Fed to continue to pump money into the economy to encourage growth.
   Even Fed Chair Janet Yellen has hinted that the time may well have come. (Then again, it may not.) But that's no proof that the Fed actually will do it.
   An interest rate boost from the target of 0.25 percent for the federal funds rate, even to the still minimal 0.5 percent, would cascade through the rest of the economy, to the benefit of some and the detriment of others.
   Credit card rates for consumers remain well into double digits, and a guideline hike would send them even higher, which means consumers would stop buying. Which means retailers would suffer, which means less production, which means job layoffs, which means less income for households.
   Meanwhile, corporations would pay more for operating capital, which means less borrowing, which means financial institutions would charge more to make up the difference.
   And around and down it goes.

   The American economy is the strongest it has been in eight years, and the total output of more than $17 trillion in goods and services is more than double what it was some 20 years ago. But is America strong enough to survive alone, as some of the country's major trading partners trip over higher worldwide interest rates? Certain it is that higher interest rates in America will affect financial markets in other nations, and if another nation is in economic difficulty, higher borrowing costs will have repercussions around the world.
   So as we concluded ten days ago, the Fed has three options -- raise rates, lower rates, of do nothing. The central bank's key lending rate is near zero now, so it can't go lower. An increase would likely stall the growth potential the economy now has. Therefore, the third option -- doing neither of the above -- would be the safer path, leaving a moderately healthy economy to continue its slow but steady growth.

   If it ain't broke, don't fix it.