Sept. 18--The campers at the Federal Reserve Board saw a few distant clouds and called off their hike.
The coaches at the Fed looked at fourth down and inches and chose to punt.
They had the sniffles so they stayed in bed.
Overly cautious? You can take it to the Bank.
The Fed's decision Thursday to hold interest rates near zero unnecessarily delays an important reckoning for America: the day the economy formally comes off its war footing and returns to a more stable and predictable trajectory.
The way things normally work: The central bank manages interest rates in response to actual conditions in the economy. The Fed raises or lowers rates, making borrowing costs more or less expensive, to influence business decisions -- all part of its mandate to get as many people working as possible while keeping inflation a tame 2 percent.
But as we all know, the global economy blew up in 2008. The Fed cut rates to near zero as part of its emergency response to the Great Recession, and that's where rates have stayed ever since. Markets have come back, jobs have come back, a sense of normalcy has returned -- yet the Fed funds rate is still bobbing on zero. That leaves investors and business owners to wonder: When can they start making decisions based on appraisals of the real world, and not the prognostications and fears of Fed policymakers?
A look at the numbers helps make a good case for declaring the economy ready to accept a rate hike. Growth is at about 2.25 percent. Unemployment is at 5.1 percent, which is close to the theoretical full employment level. Energy prices are low, disposable income is up and investment growth is decent, the stock market hit record highs this year before wobbling.
Not bad, right?
The worst that can be said is the U.S. economy doesn't feel as healthy as it should. The most troubling issue is the labor participation rate: There are still too many people who have given up looking for full-time employment, or who have part-time work but want full-time.
An argument can be made, Fed chief Janet Yellen said Thursday, that the country has bounced back and it's time for rates to be raised. "The economy has been performing well and is expected to continue to do so," she told reporters -- after the Fed announced its decisions to hold the line.
The Fed's reasoning had very little to do with how things look in Illinois, or California, or Texas. The main culprit is China. The worry is that "recent global and economic financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the Fed said in a statement.
Yellen elaborated to reporters that the Fed has China on the brain. We know about that country's slump: sluggish growth, an imploding stock market, a botched effort by the leaders to steer the economy back to rapid expansion. China's got some trouble, certainly. But at what point did the Fed decide to shift its focus to include machinations in a foreign country where there isn't a crisis but simply the inevitable stumbles of a nation on the rise?
When Yellen talked about the risk of a more abrupt slowdown in China, she cited Beijing's bungling of its economic management. The market reaction to China, she noted, reflected concerns about the "deftness" of policymakers. Well, part of the challenge of assessing China is that its economic statistics are unreliable and its decision-making is opaque. Deftness is a continual issue, in other words. China's economy probably won't be more transparent in one month or one year than it is today.
Yet the Fed is holding the line based on its ability to assess future risks in a Chinese economy often described as a black box? Strange.
The better course, it seems to us, would have been to pull the trigger on a modest rate hike, and start to re-establish a long-sought feeling of normalcy. It would deliver certainty to the markets and business leaders, and would give the Fed the future option to cut rates again if another crisis occurs.
Though it's not the Fed's responsibility to inject some extra confidence into the economy, the decision to increase rates would officially put to rest one legacy of an economic crisis that still looms large in the consciousness of many Americans.
We offer this observation with a polite tone and a cheerful smile: The Fed can raise interest rates as soon as its next regular meeting, in October.
But it should have pulled the trigger Thursday.
