Why the FED Should Not Increase Interest Rates in December

November 13, 2015
William C. Dudley, president of the Federal Bank of New York, said this week he sees a stronger case for moving ahead with interest rate hikes when the FOMC meets in mid-December.  The Fed has held the discount rate near zero since late 2008 to encourage borrowing by businesses and consumers in the hopes of stimulating the economy.
To some extent, the jobs report for October showing the economy adding 271,000 new jobs may be one catalyst for a rate hike.  However, according to AFL-CIO Chief Economist William E. Spriggs, “our economy remains fragile.”  We would hazard that the types of jobs this current economy is creating has not led to sustainable growth.
Indeed, just today the Commerce Department said retail sales rose a seasonally adjusted 0.1% last month, after being unchanged for the prior 2 months, and missing the 0.3% forecast.  Retailers reporting quarterly results this week have reported numbers that are clearly not reflective of a robust economy.  Both Macy’s and Nordstrom reported less than stellar results and slashed their forecasts.  Macy’s is sitting on excessive inventories, Fossil is expecting current quarter sales to fall by 16%, Cisco is citing a slowdown in order growth, automobile sales are declining, and the list goes on.  In Europe, the ECB plans to step up its monetary stimulus to its economies next month.
We are wondering if the Fed can really normalize US monetary policy when the rest of the world feels things are quite abnormal.  We would therefore make the case that rates should remain unchanged until real and sustainable growth can be seen in the economy, or we run the risk of damaging this fragile recovery.