The Federal Reserve may have inched closer this week to raising rates, but economist Robert Brusca says higher interest rates won't derail a recovery. He is, however, concerned about current Fed policy, likening it to a car revving its engine, but not moving any faster.
The sluggish economic recovery is not giving the Federal Reserve enough confidence to raise short-term interest rates just yet, the central bank said Wednesday. The Fed has kept the federal funds rate near zero since December 2008. “The economy is growing,“ Brusca, chief economist at FAO Economics, tells Yahoo Finance editor in chief Aaron Task. “The question is whether it’s growing fast enough to reduce the unemployment rate fast enough and to create any kind of pressure on prices.”
The Fed reduced its economic projections Wednesday and said that it continues to believe interest rates should remain low for a "considerable time" after the central bank wraps up its bond buying stimulus program. The central bank will continue to taper its asset purchases next month by another $10 billion. Officials hope to end the program after October. However, the Fed is expected to keep rates steady until at least the spring of next year.
Fed chair Janet Yellen said in a news conference following the two-day FOMC meeting, "If the pace of progress in achieving our goals were to quicken, if it were to accelerate, it's likely that the [Fed] would begin raising its target for the federal funds rate sooner than is now anticipated…and the opposite is also true." Brusca points out that the Fed has missed both its unemployment objective and its inflation objective. Brusca says missing these targets by such a margin normally would "push the Fed to have an even easier policy.” However, Brusca quips, “I don’t think it’s possible to have an even easier policy.”
So what can investors expect as the recovery continues and “considerable time” evolves into more immediate language? Brusca doesn’t think “low interest rates are the 'be all and end all' to growth.” He points to the slow, sometimes painfully slow, economic recovery. “If low interest rates were so important,” he says, “We wouldn’t be here right now.”
Brusca believes the first rate hike will “probably create an outsized move in the bond market.” However, he believes that if the economy continues to perform moderately in the face of the rate hikes, the bond market will come back. “You’ll get this knee jerk reaction to the first move,” he says, “but after that, normalization.”
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