Nothing To Fear From Fed Rate Increase
There is an overwhelming consensus of opinion that the markets, and the majority of mainstream commentators, that when the Fed begins raising rates that it is a “good thing.”
The primary premise behind that consensus is that the economy is now growing steady enough to absorb the impact of higher interest rates. This opinion was espoused yesterday by Kansas City Fed President Esther George who stated:
“I don’t want us to be behind the curve in beginning to normalize interest rates. When you see the economy getting as close as we are to full employment, to stable inflation, it would suggest to me that the time has come to do that.”
There are a couple of things worth considering at this point:
1) As I addressed previously, the economy is very closely tied to the cost of capital. When you consider that a large chunk of corporate profitability as of late has been created through the use of cheap loans to buy back shares, rising borrowing costs make this option much less lucrative. Rising borrowing costs also directly impact the consumer spending through variable rate credit, auto sales as loan payments rise, and housing through increase mortgage payments. (The referenced article has further points on this issue)
2) With regards to the statement, on full employment there is really only one type of employment that ultimately matters which is full-time. Part-time and temporary employment do not foster household formation, higher levels of consumer spending or increased tax revenues. The issue is that even though the unemployment rate is approaching levels of “full-employment,” it has been primarily a function of the shrinking of the labor force. As shown in the chart below, full-time employment is basically at the same level as it has been since the financial crisis as “real employment” has primarily been a function of population growth and little else.
