Economist: Fed Wise to Wait on Interest Rate Hike

The Federal Reserve was wise to wait on lifting short-term interest rates, says LandOwner Economic Consultant Dr. Vince Malanga. Here is his most recent economic comments:

"Had the Federal Reserve raised interest rates in September, as many had advocated, it could have been a policy mistake with fears of a 1937 style relapse scenario arising. This is because September's labor report showed a measurable softening for a third consecutive month. Additionally, sizable job reduction plans have recently been announced by high profile companies, suggesting this year's remaining jobs reports will at best be uninspiring.

Labor data has historically been viewed as a lagging indicator. And in the economy's current funk we think the data is finally catching up with sectoral recessions hitting the agriculture, energy, and export industries. Were the economy fundamentally sound it would be able to shrug off these ills and plow forward. But it is not fundamentally sound, being burdened as it is by excess regulation and a paralyzed fiscal condition. This is why we have consistently urged the monetary authority to refrain from any move toward interest rate normalization and allow the economy to run hot i.e. above trend. If growth were above trend it would be able to withstand the shocks emanating from domestic sectoral weakness and weaknesses abroad.

If the Federal Reserve is finally ready to concede to this methodology, progress could be made for several reasons. First, the permanency of lower energy prices is seeping into household expectations, allowing for more spending. Vehicle sales were strong in September as was discretionary spending in restaurants etc.. Second, the dollar exchange rate has and should continue a slow and steady retreat, reducing a headwind for multinational companies, cushioning commodity prices, and indirectly inducing greater liquidity injections abroad. Third, mortgage rates are already falling since the Fed's interest rate decision and this would be encouraged, boosting refinancing and new purchases.

Finally, although not directly linked to Federal Reserve policy, evidence is beginning to emerge suggesting a stabilization in China's economy. Consumer confidence is rising amid signs of a stabilization in the real estate market. New stimulus measures are in place and more is very likely. If China is stabilizing, there would be positive reverberations throughout the developing world, aided and abetted by a less onerous dollar exchange rate.

These are tentative developments. But what is now imperative is that if positive effects begin to show up in economic data, the Federal Reserve's reaction should be delayed ....and delayed. Recent comments from senior Federal Reserve officials implied an absence of bubbles in the economy - something that has worried many. The preponderance of evidence points to too-weak growth and too-low inflation. There is no reason for rate normalization in the foreseeable future and if the fed agrees it should be made clear so that financial markets and businesses can gain confidence, thus allowing the economy to run hot.

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