By boosting housing, capital, and confidence.
by Luke Kawa
Some economists are suggesting that the best thing the Federal Reserve could do for the U.S. economy would be to raise interest rates for the first time in nearly a decade, mounting an argument that flies in the face of conventional economic wisdom.
“The reason [the Fed] should have raised rates in September and the reason, failing that, that it should do so this month isn’t that the economy can handle the pain but rather that it could do with the help,” David Kelly, chief global strategist at JPMorgan Asset Management, wrote in a recent research note.
The consensus view, steeped in decades of economic thought, maintains that higher rates encourage saving instead of spending by households and raises the cost of capital for businesses, weakening current demand. Higher interest rates could also be a negative for asset values, as income generated would be subject to a higher discount rate. The ensuing negative wealth effect would be a drag on consumption. An increase in interest rates is also typically accompanied by a rise in the U.S. dollar, which crimps competitiveness and weighs on production in the tradable goods sectors.
But in practice, the effects of liftoff might well be different this time, some analysts contend. Read More…