You're The Judge: Can The Job Market Stand Interest Rate Hikes?
The Labor Department's July jobs report, released Friday, showed employers added 215,000 workers and that the unemployment rate was unchanged at 5.3 percent.
So how would you interpret that report if you were a policymaker for the nation's central bank?
It really — really — matters how you read those numbers, because you have a huge decision to make in September. You and the other Federal Reserve Board policymakers have to set the direction for interest rates.
Lots of economists say you should vote for the first rate hike since 2006. But will you?
If you raise interest rates too soon, you might choke off growth. Think of the young family that wants a bigger car but needs an affordable loan. Consider the small-business owner who needs to borrow money to hire more workers.
Higher interest rates would hurt them and slow growth for all of us; maybe even bring on a recession.
But then think about the retirees who have earned almost no interest on their savings for years. Superlow rates have not only hurt savers; they've enabled some businesses to buy assets they can't really afford, driving up prices and possibly creating bubbles. (Remember the pain caused by the housing bubble.)
Holding down interest rates could hurt savers and lead to inflation and dangerous price bubbles.
So what should you do? Let's dig into this latest evidence to help make a decision.
Factors Favoring A Rate Hike
Given that evidence, a reasonable person might say the economy is strong enough to allow interest rates to rise a bit in September. Nariman Behravesh, chief economist at IHS Global Insight, reached exactly that conclusion, saying: "Another solid jobs month in July strengthens the case for a September Fed rate hike."
Factors Opposing A Rate Hike
That evidence may suggest the economy is still too weak to absorb higher interest rates. "This morning's report was hardly suggestive of improvement," Lindsey Piegza, chief economist at Stifel Fixed Income, said in her assessment. "Status quo is hardly a step in the right direction, making it difficult for the Fed to justify a near-term rate increase."
The Fed will have one more chance to collect evidence before making a decision. The next monthly jobs report is due out Sept. 4, and the Fed's policymakers will meet Sept. 16 and 17.
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