U.S. Economic Growth too Slow to Justify Rate Increase


U.S. Economic Growth

June 2, 2015 – A number of financial pundits have predicted that the Feds will increase interest rates around the mid of this year. They say that the time is near for the Fed to end its support for cheap money. Low unemployment levels and climbing inflations rates will push the Feds to increase rates for the first time since 2006.

However, a Federal Reserve’s leading regional member, Eric Rosengren, stated that the U.S. economy is too weak to support the rate hike. The requirements for tightening in monetary conditions have not been met and therefore the Feds are not in a position to raise interest rates.

Mr. Eric Rosengren currently serves as the President of the Boston Federal Reserve Bank. He is also a non-voting member of FOMC (Federal Open Market Committee) and participates in its meetings.

The latest remark by the leading Federal Reserve member shows the quandary being faced by the policy makers at the Fed. At the one end of the spectrum are Fed members such as Fed Chairman Janet Yellen who say that the conditions are just about right for fed rate hike, while the other Fed members are skeptical rather critical about the justification for increasing interest rate.

Rosengren belongs to the latter group who think that the U.S. economy is too weak to support an increase in interest rates. According to most recent GDP figures, the U.S. economy shrank at a rate of 0.7% per annum in Q1 2015. Although some economists state the lackluster performance was due to harsh winter season that had engulfed regions across the northeast. They predict that the economy will rebound in second quarter this year.

Rosengren, however, has a pessimistic outlook on the economy and believes that the Fed should not take any action to increase the rate. The logic behind his argument is that the previous monetary tightening took place when the GDP growth was about 3% per annum. This year, GDP output is expected to remain below 2%. Therefore, the economy does not meet the conditions for a rate increase.

Consumers Fearful of Another Crises

Rosengren has pointed out that the private consumption has not returned to the level before the 2008 economic crises. Consumers are spending cautiously as the scars of the financial meltdown have not healed completely. This point alone indicates that the economy is not in a good shape at the moment to absorb a hike in interest rate.

And data released by Commerce department on Monday seems to confirm Rosengren’s views as consumer spending has remain largely unchanged with a 0.2 percent rise despite an increase in personal incomes. Weak spending rate in the first quarter may well be due to temporary factors such as harsh winter. But retail figures also remained low that indicates long term adverse affect on the economy.

At the moment, the debate is still going on whether the Feds will raise interest rate or not this year. However, one thing that is revealed from Rosenberg’s remarks is that we should be prepared for negative shock from an interest rate hike.

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