The latest retail sales reading that showed June sales (excluding automobiles) slipped 0.1 percent doesn’t suggest the US economy has turned a corner and the economy would be able to sustain a hike in interest rates, said Austan Goolsbee of the Chicago Booth School of Business.
While global events such as the turmoil in Greece and the meltdown of Chinese stock market are a cause for concern, the domestic economy has not lived up to investors’ expectations either and failed to meet the Fed’s own projection.
The economy is likely to follow the same path witnessed in the past few years and the Federal Reserve will keep pushing back the rate lift-off because the data is not strong enough, he observed.
Asked if believes the US central bank could still raise interest rates in December, Austan answered in the affirmative. The Fed is desperate to raise rates and will start the process of rate normalization knowing well it could derail the economy’s modest growth pace, he argued.
Despite the zero interest rate regime, it’s difficult to say the economy has benefited from record low rates. Asked to comment, Austan said in normal times, it would be difficult to justify zero rates when the unemployment rate is hovering around 5%-5.5%.
However, going by international experience, for example, latest data from the UK showed inflation actually dropped to zero and they are teetering on the edge of deflation again.
Central banks should not rush to raise rates only to realize later they have made the situation worse, which would put a question mark around their credibility, he noted.
All data points do not suggest the economy is sputtering. Asked to explain his pessimism, Austan said though the economy is not on the brink of a recession, it never really took off either, suggesting consumers are not going to go back to the old days.
While the Fed forecasts a return to the golden days, investors are more likely to remain in the “perennial waiting” mode for the good dough hoping the consumers are going to come back leading into some V-shape recovery, he observed.
Asked if holding down rates artificially causes dislocations in the economy apart from affecting the currency, Austan answered in affirmative. While there’s no doubt artificial low rates distort prices of risks, the alternative is even worse. Hence if the Fed wait another two to four months before making its move, there’s unlikely to be any problem for the economy, since there’s no sign of any upward price pressures or wage inflation, he concluded.
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