Why the Fed Didn’t (and won’t) Raise Interest Rates

By Jeff Harding

It’s not too difficult to understand why the Fed didn’t raise interest rates today. All you need to do is read the news; you’ll get the same information that the Fed gets only simpler and easier to understand.

To put the issue in perspective, many critics are saying that the Fed needs to worry about future inflation because of the longer term impacts of trying to flood the economy with cash. You hear a lot these says about sopping up all the excess credit the Fed has created. For example,

After criticism that the Fed left rates too low for too long early this decade, some policymakers are especially wary of leaving too much stimulus in the economy and risking an inflation outbreak after the economic recovery. Some regional Fed officials have suggested in recent weeks that the Fed must pay closer attention to the threat of inflation.

“The markets won’t be fooled by artificially low rates for long,” the president of the Federal Reserve Bank of Kansas City, Thomas Hoenig, said earlier this month. “I suggest strongly that we need to be alert to the markets’ message and begin in earnest to bring monetary policy into better balance before inflation forces our hand.”

They are still very worried about deflation which makes them ignore the inflationary impacts of their policy.

Here is what the Fed saw to give them pause:

1. Unemployment is still on the way up and is expected to hit 10% soon. It’s 9.4% now.
2. They are so worried about unemployment that the Administration told the States that they can just do a simple headcount to determine how many of those 3.5 million jobs are being saved (i.e., when in doubt, change the rules).
3. Sales of new single-family homes decreased by 0.6% to a seasonally adjusted annual rate of 342,000 compared to the prior month. The economists surveyed expected a 2.3% increase because sales increased last month. Year-over-year, new-home sales were down 32.8% from a year ago. Prices keep falling: another 3.4%.
4. Manufacturers durable goods order increased 1.8%, but they are down 26.8% from a year ago. Since financing is difficult to get, the leasing and financing index fell to 41% compared to a year ago.
5. Industrial production fell 1.1% in May and manufacturers are still cutting inventory (0.8%).
6. Unfilled manufacturers’ orders, a sign of future demand, decreased 0.3%, the eighth drop in a row.
7. Last week the 10 year Treasury note almost hit 4%, up 150 basis points since March, showing an alarming response to the coming deficit that needs to be financed by September.
8. The mortgage rate hit 5.6% last week. Not good for the housing market.

None of this is good news in their book, so they are not going to rock the boat. What happened to their faith in green shoots?

By the way, the report on consumer spending comes out Friday. That will be interesting.