Investors fear the Federal Reserve will raise rates. Here's why they shouldn't worry so much about that happening soon.
The stock market has been falling recently on fears that the Federal Reserve will raise interest rates sooner than some thought, perhaps as early as June. Indeed, on Wednesday, The Wall Street Journal reported that the Fed is thinking about dropping a key word in its next policy statement. That might pave the way for a hike as soon as the middle of the year.
So, when will the Fed pull the trigger? My bet: It’s won’t happen as soon as people think. Here are four reasons the Fed is not going to raise rates anytime soon (or at least not as soon as June, or even this summer):
1. Rates can still go lower
Many people say the Fed needs to raise interest rates because they have no where to go but up. If we were to run into another recession in the U.S. or just an economic downturn, the argument goes, then the Fed would not be able to lower interest rates to give the economy a boost.
The “lower bound” is a term economists use to describe the long-held belief that interest rates can’t go below zero. But, as we have seen recently, that’s not true. Currently, Switzerland’s central bank has set its short-term interest rates at negative 0.75%. Many economists there think it should be set as low as negative 1.5%. And plenty of European countries are now selling bonds with negative interest rates.
So, there might be a lower bound, but it’s not zero, meaning the Fed doesn’t need to raise interest rates just so they can cut them later.
2. The job market is weaker than it looks
Unemployment dropped to 5.5% in February. The jobs report for that month kicked off the latest round of anxiety about the trajectory of interest rates. But the job market may not be as strong as it looks. Thomas Lam, an economist at RHB Securities Singapore who watches the flow of workers in and out of employment, says that the so-called job finding rate—that is, the chances of an unemployed person landing a job in any given month—has been growing worse this year. Last month’s report showed a rise in the number of long-term unemployed people as well as a jump in the number of people not included in the workforce, meaning they are not even looking for work.
On top of that, wages are not rising. The February report showed that the average hourly pay of a U.S. worker has risen just $0.03 in the past year.
3. The global economy is slowing
The U.S. economy’s recovery may finally be coming on strong. But take a look around. The rest of the world is slowing down. Much of Europe is in a recession or near it. And China recently cut its GDP estimate, again. As a large consumer of natural resources, even a small slowdown in China is bound to have repercussions for the rest of the world. And while lower oil prices should help the U.S. economy, it’s a disaster for economies in the Middle East, Brazil, and particularly Russia. The U.S. economy is more connected to the global economy than ever before, so all of this is bound to slow America down a bit as well.
4. A strong dollar will slow exports
Raising interest rates is only going to make the dollar—which has already been rising against other currencies—climb higher. That’s likely to make it harder for U.S. companies to export their goods around the world, where they are likely to see less demand anyway.
What’s more, falling prices around the world, along with the drop in oil prices, is likely to hold down costs here as well. With very little inflation, the Fed doesn’t have to rush to raise interest rates. And it hasn’t been in a rush. Interest rates have been close to zero for nearly seven years. Don’t expect that to change so fast.