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.


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