Why the fed should raise its rate in September

by Justin da Rosa27 Aug 2015
A former big bank chairman is laying out his argument in favor of a Federal Reserve interest rate hike in September. 

While originators may not agree, one former bank executive is laying out his argument for an interest rate increase at the next Fed meeting.

“The market has been expecting an increase for some time and the Fed has also been signaling it,” Richard Kovacevich, former chairman and CEO of Wells Fargo, writes in an opinion piece for CNBC. “When the market expects the Fed to do something that eventually the Fed must do, the Fed should do it as soon as possible.”

Financial services players are keeping a close eye on financial markets and wondering what effect the stock market volatility – and the turmoil in China – will have on the Fed’s rate decision next month.

Many have long-called for a hike, but are now predicting the central bank will maintain its rate. Kovacevich, however, is maintaining his call.

Kovacevich notes the most likely roadblock confronting the potential September increase is the Fed’s worry around the potential for deflation, but he argues the central bank’s goal of 2% inflation is wrong.

“First of all, given all the technological changes, improvements and innovations occurring in products we purchase today, how can anyone even measure inflation accurately?” Kovacevich writes. “Secondly, low inflation has been helpful to our economy because although wages have been low, inflation has been even lower, increasing the purchasing power for the average American worker.”

While deflation should be a concern, Kovacevich writes, the Fed is using the wrong metric for tracking it.

Instead of watching inflation, it should be focusing on savings rates.

“Fiscal and monetary policy makers should not be focused on increased inflation. They should be focused on growing our GDP at a 3 percent or greater rate,” Kovacevich writes. “To achieve this, in addition to a fed-funds increase, the administration and Congress should agree to lower marginal individual and corporate tax rates in a revenue-neutral way.”

Still, he may be in the minority, with most economists predicting the Fed will hold off on raising its benchmark rate in September.

Recently, the New York Times reported the market priced in a 24% chance of a rate increase next month, which is down from 48% the week prior.


  • by Brad | 8/27/2015 10:43:27 AM

    Dick makes some really solid points here. The most important of which states that the metrics of measuring inflation are error-ed. The only thing we know is that to take a vacation, hire a plumber, rent an apartment or eat a cheeseburger costs twice as much as is it did four years ago. Just because we measure our inflation off consumer goods from a country that keeps artificially devaluing its currency, does not mean we are not experiencing inflation in this country. And how about the Fed should keep on schedule to raise interest rates firstly because they said the would and secondly because American Fiscal Policy should not be so easily swayed by foreign markets. The amount of government intervention in our economy is staggering and sickening. The people that founded our financial system did not want this and cautioned of it.

  • by Tony | 8/27/2015 12:56:50 PM

    To read these types of statements become very confusing to those that may have a limited knowledge of the influential financing statements that are generated by the government. It is sometimes impossible to believe statements that are put out by Washington D.C. If those people in positions of authority would realize that they were elected to represent those of us that are not policy making authorities. We need those in Washington to erase the "D' & "R" from their titles and realize that the vast majority of citizens want good decisions and for them to talk with one another and think about those that put them in a position to make decisions on their behalf. If there are continual decisions made that cause confusion and fear then the fear becomes the result. Fear drives bad decisions and bad decisions cause most people to look for someone to blame rather than solve problems!!

  • by Dave | 8/27/2015 1:24:18 PM

    I can see why Mr. Kavacevich's opinion is in the minority. The market is not looking for the to Fed increase. To the contrary, the market rallies every time weak economic news/data comes out supporting the fact that the Fed will not raise rates. For the market to rally on weak economic data means the market "party" will only continue so long as the Fed does not raise rates. All of this is totally contrary to why a market should rally, i.e. because the economy is strong, wages and employment are growing and future inflation is a valid concern. The prevailing news nowadays is the future prospect of deflation. Our treasury rates are already multiple times higher than any other major foreign economy. The American consumer will not purchase unless interest rates are low or zero. Just look at car or furniture advertisements. To support current prices they have to offer zero interest financing for even longer extended terms. Does that sound like a consumer eager to borrow money? Why the Fed would raise rates with this view in mind makes no sense. The only reason the Fed would raise rates would be to further the illusion that they have the ability control the pace of economic activity. It is already apparent that they don't since, after years or low rates we still have a stronger prospect of deflation versus inflation.


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