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Readers Split on Benefit of Fed, Interest Rate Hike

After a decade of holding interest rates near zero, the Federal Reserve has raised rates three times in a year. While many would agree that the “free money” environment following the financial crisis of 2007-2009 has fueled the stock market to its long bull run, savers have been seriously hurt by low money market rates.

As the Fed starts raising short-term interest rates, they often use inflation as a barometer of whether the economy is picking up too much steam and a tap on the brakes is needed.

The current data seems to support the notion that inflation is absent from the current economic expansion. The Fed’s favored inflation gauge, the Core PCE Price Index, stood at a 1.5% annual rate in June. The Consumer Price Index (CPI) was also short of the Fed’s 2.0% target, at 1.7%.

The next meeting of the Federal Open Market Committee takes place on the 19th and 20th of this month. Currently, there is only a 1.4% chance that the Fed will raise interest rates at that meeting, according to the CME Group’s FedWatch Tool.

While the models and economists are usually right when predicting the Fed’s next move, the Fed has been known to throw the occasional curve ball.

AAII Weekly Survey Question

With most signals pointing toward the Fed holding interest rates steady in a couple of weeks, we asked our readers whether an unexpected interest rate hike would be good or bad for the U.S. economy.

Here are the results:

In all, 1,359 readers responded to the question.

Slightly less than half of the respondents, 48%, said that an interest rate increase at this time would be good for the economy.

Only a quarter of readers, 25%, said that an interest rate increase would harm the economy.

In the middle, at 27%, were those who don’t know whether an interest rate increase would benefit or harm the economy.

Weekly Special Question

In recent years, the role and effectiveness of the Federal Reserve have been called into question by investors, economists and politicians. To gauge the temperature of our readers on the topic, last week’s special question asked:

What do you think are the ways in which the Federal Reserve helps and hurts the U.S. economy and, thus, the stock market?

We received 127 responses to this question.

By almost a two-to-one margin, there were more responses saying the Fed hurts the economy/stock market versus those that say it helps the economy and stock market.

The biggest criticism of the Fed from this group is the low-interest rate environment it has kept us at for so long. Undoubtedly, many of these readers have been adversely affected by the loss of interest income. Out of this group, though, less than 8% of respondents called for the abolishment of the Fed.

From the group that says the Fed helps the economy/stock market, the biggest benefit they see is the Fed keeping the economy moving along evenly—shaving off the tops and keeping inflation from running rampant and rounding out the bottoms and preventing the economy from contracting too far, too fast.

Here is a sampling of the responses to the special question:

  • “I’d like to believe that the FED actually makes ‘long-term’ decisions. So even if the market fluctuates, or corrects, it is only short term and the policies will be better in the long run.”
  • “There is an awful lot of money in the market now and it needs to be slowed down. The Federal Reserve can accomplish this.”
  • “They ran up over $3 trillion in debt. That can’t be a good thing. They need to begin to seriously decrease outstanding debt.”
  • “By keeping interest rates so low for so long, they have inhibited income investors from spending their money (retirees mainly). This is a drag on the economy and causes hardship for these people.”
  • “[The] Fed’s job should be monetary policy (money supply and short-term interests rates) not employment, particularly with some board members (including the chair) believing in the Phillips curve. They do more harm than good to the economy. They should be bankers, not academics.”
  • “How do you spell fraud, evil and corruption? My belief is the Fed is not legit and owned by the powers that rule our universe.”
  • “It helps the economy because it regulates banks.”
  • “The Fed provides an impression that someone with a set of non-political, financial priorities is steering our economy and will use the limited tools that it has available to keep the economy from going too far off course.”

Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at http://www.aaii.com/memberquestion.

 

 

One thought on “Readers Split on Benefit of Fed, Interest Rate Hike”

  1. Isn’t the stock market inflated? We use the words “high multiple” instead of “inflation”‘ but if all the earnings and dividends cost more, isn’t that inflation? Seems like the fed is more of a follower than a leader and therefore part of short term fluctuations, if not a direct cause. I wonder how much readers understand the dramatic deleterious effect that even small amounts of inflation have on future spending power for investesments that we are so keen to accumulate and compound. When I did the math in a spreadsheet I had a hard time digesting how bad it could be then thought about how much additional risk we have to take up as super low interest rates force retirees into stocks.
    The idea that a few flawed intellectuals have their finger on the money button and that a certain level of inflation is a Target is frightening.
    Have you thought about an article on causes and effects of inflation & what the best defenses are.? Stocks are actually quite good I believe and bonds seriously deficient ( gut feel). Gold sometimes but lumps of metal don’t pay dividends.

     

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