Reality Check: U.S. Economy Is Not Ready for Interest Rate Hike

U.S. EconomyA top Federal Reserve official says there are good arguments for raising rates in June. And, the longer the Federal Reserve delays hiking rates, the more the U.S. economy falls behind. While many think the Federal Reserve needs to start making up ground, the fact of the matter is that the average American can’t afford a rate hike. In fact, any such hike could further cobble the already fragile U.S. economy.

The Case FOR an Interest Rate Hike

Back in December, Federal Reserve Chair Janet Yellen raised rates for the first time in nearly a decade, by a razor-thin 0.25%. While not a major hike, the increase did show that the Federal Reserve thought the U.S. economy was strong enough to start to stand on its own two feet.

Her optimism was a little premature. A couple weeks later, we entered 2016 and stocks were hammered with their worst start to a year ever. Stocks crashed, gold soared, and investors tightened their belts on fears the U.S. would slip back into a recession.

Here we are, four months later, and interest rates have stayed put. In April, Yellen kept the Fed’s key lending rate unchanged in the range of 0.25% to 0.50%, noting that the U.S. economy had slowed and consumer spending had dried up. This, coupled with a weak global economy, was more than enough reason for Yellen to remain cautious about the U.S. economic recovery. (Source: “Federal Reserve Statement,” Board of Governors of the Federal Reserve System, April 27, 2016.)

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Not everyone is so downbeat on the U.S. economy though. Jeffrey Lacker, president of the Federal Reserve of Richmond, said recently that there are more than enough compelling reasons for raising rates next month. Plus, a rate hike has been a long time in the making. (Source: “Top Fed official: ‘The case for raising rates looks pretty strong.’,” The Washington Post, May 16, 2016.)

He notes that the U.S. economy is “relatively strong” and that the abysmal first-quarter gross domestic product (GDP) of 0.5% “seems pretty clearly to be a transitory dip in growth.” Yes, he admits that consumer spending has dipped “a bit” but the fundamentals remain strong. On top of that, housing is making a comeback, U.S. jobs data is good, and, overall, the U.S. economy is resilient. At the same time, he says, the downside scenarios simply haven’t materialized. (Source: Ibid.)

This is only opinion, and opinion is not truth, but I’m not so sure a wealthy banker has his pulse on Main Street America.

The Case AGAINST an Interest Rate Hike

There are a lot of reasons why the U.S. cannot handle an interest rate hike in June. I enter as evidence the following facts:

  • Lousy first-quarter GDP growth of 0.5%
  • U.S. jobless data hitting a 14-month high
  • U.S. jobs growth at its weakest level in seven years
  • Ratio of business inventories to sales rising to near recessionary levels
  • Amount of new orders for durable goods received by manufacturers in the U.S. has experienced month-over-month declines since February of 2015
  • Underemployment rate remains near 10%
  • S&P 500 earnings recession extends to four consecutive months
  • Consumer confidence levels plunging

In addition to all that, Americans are swimming in debt and cannot afford an interest rate hike. I imagine the Federal Reserve doesn’t lose sleep over the state of the average American, but taken collectively, the Fed has to be concerned about the health of the U.S. economy. With three-quarters of America’s GDP coming from consumer spending, the Fed has to be a little concerned about our financial welfare.

If so, the Fed must be interested to know that the average indebted American household is $131,000 in debt and paying more than $6,000 in interest annually. It gets better! Those with credit card debt owe roughly $16,000 each and spend nearly three percent of their household income on interest. (Source: “2015 American Household Credit Card Debt Study,” Nerd Wallet, last accessed May 17, 2016.)

All in, U.S. consumers have more than $12.0 trillion in debt—that’s $37,000 per person. More than $700 billion of that is on credit cards.

What about wage growth?  What wage growth? The rising cost of living coupled with stagnating or declining wage growth since 2003 has pushed more and more households into debt. Over the last 12 years, the only areas where wage growth has outpaced price increases are in clothing, recreation, and transport.

Meanwhile, medicine, food, and housing costs are outpacing wage growth. Medical bills have almost doubled the rate of wages, while food has increased by 39%. Since 2003, wage growth has increased by 26%. Meanwhile, the cost of living is up 29%. The difference may not sound like much, but shortfall has to come from somewhere—and that’s borrowing, which leads to unsustainable debt levels.

Chances are slim that the Federal Reserve will raise rates in June, but you never know. Mind you, judging by all the weak, disappointing, abysmal economic data coming out of the U.S., it’s no wonder Janet Yellen said she “won’t completely rule out negative interest rates.” (Source: “JANET YELLEN: I won’t completely rule out negative interest rates,” Business Insider, May 12, 2016.)