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Sunday, 20 September 2015 18:07

Fed’s inaction on interest rates sends wrong message, economists say

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Isley Isley

The Federal Reserve’s decision to hold interest rates low disappointed a couple of local economists who say it sends the wrong message about the state of the U.S. economy.

After all, if the Federal Open Market Committee isn’t confident enough to move interest rates off of historic lows after seven years, then what’s a business owner supposed to think, said Paul Isely, an economist and associate dean at Grand Valley State University’s Seidman College of Business.

Holding interest rates low can cause uncertainty in the economy that in turn affects business spending and investments, Isely said.

“In doing this, they’re saying the economy is in bad shape. Are you going to go invest in a business right now?” he said. “You go, ‘I thought it was good. I’d better keep some cash close to the vest.’”

The Fed on Thursday noted that the U.S. economy is growing at a moderate rate and that inflation is in check, but cited the global economy, “developments abroad” such as slower economic growth in China, and its potential effects domestically in opting not to begin raising interest rates.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the FOMC said in a statement.

Mitch Stapley, chief investment officer at ClearArc Capital in Grand Rapids, called the decision a “lost opportunity” to begin returning interest rates to normal, pre-recession levels. In keeping rates so low, the FOMC has little ability to react should the U.S. economy start to falter, Stapley said.

“You just get the feeling that the plane is flying six feet above the ground and if something happens, if an engine coughs, you have no room to maneuver. You are just flat on the deck,” Stapley said. “It’s a lost opportunity for the Fed to begin to normalize and grab some tools for the toolbox. They’re pretty much out of tools right now.”

Stapley believes that moving the federal funds rate up 0.25 percent “would not, in our estimation, impact corporate earnings or growth in the United States at all,” even with slightly higher borrowing costs for consumers and businesses.

“That’s what’s so ludicrous about this. The Fed can afford to raise rates here,” he said. “We’re not talking about them getting tight. We’re trying to get back to normal.”

When the Fed eventually does begin to push up interest rates, Stapley believes it will “be a slow, slow drawn-out process.”

When that may occur, nobody knows for sure, according to sources.

Isely doubts that Fed will move rates when it meets again in October, leaving the decision to run into 2016, a presidential election year that makes the decision tougher because of the potential political implications, he said.

“The data we get between now and October isn’t going to change anybody’s mind,” he said.

George Mokrzan, senior economist at Huntington National Bank, said he thought there was a “50-50 chance” the FOMC would begin raising interest rates.

For Michigan, keeping rates low should provide a “little stimulus a little longer” for U.S. auto sales that are running at a rate of 17 million units annually in North America, which is “as good as it gets,” Mokrzan said.

Interest rates will ultimately begin to rise amid projections for continued economic growth, Mokrzan said. Business owners who expect to borrow in the future for an upcoming expansion or capital purchase may want to start planning accordingly, he said.

“The path of interest rates is probably going upward going forward,” he said. “That’s an important part of the decision-making process for small businesses.”

Read 3009 times Last modified on Monday, 28 September 2015 10:44

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