Federal Reserve must double down on promise of steady interest rates

Federal Reserve Chairman Jerome Powell softened his hawkish tone in a speech this week, saying that interest rates are “just below” neutral, neither speeding up nor slowing down growth of the economy. While these remarks are welcome relief for small business owners and workers who have borne the brunt of his interest rate increases, Powell should go a step further and pause his scheduled rate hikes starting next month.

Such a move would give the economy room to run, allowing Americans to enjoy the jobs and wages they deserve after enduring years of painful stagnation in the first half of the decade. The three interest rate increases that have already taken place this year have made borrowing, business investment, and homeownership more expensive. While business and consumer sentiment remain sky high, such rate increases threaten the strong financial and labor market gains made over the last two years.

{mosads}The economy is growing at 3.5 percent, on the heels of 4.2 percent growth last quarter. It is on track to exceed 3 percent annual growth for the first time since 2005. The stock market has increased by about 30 percent since President Trump was elected, boosting retirement and college savings accounts. The unemployment rate is at the best level in 49 years, with near record lows for blacks and hispanics. Wage growth is at its fastest in a decade, and business startups have surged.

But cracks in this strong economic foundation built by the administration have started to emerge in concert with the aggressive policy agenda of the Federal Reserve. Stock markets are down. Existing home sales have fallen for eight straight months. American car sales fell by 4 percent last quarter, with General Motors announcing domestic layoffs and plant closures. Global growth forecasts have also been revised downward.

The pumping of brakes in the form of quarterly 25 basis point rate increases is being compounded by the Federal Reserve pulling the parking brake in the form of systemic unwinding of its unprecedented balance sheet accumulated as a result of quantitative easing in the aftermath of the Great Recession. This dangerous combination of tightening money threatens to put an end to the current expansion.

Meanwhile, the core inflation rate, which is the preferred measure of the central bank, came in at just 1.8 percent, in numbers released today by the Commerce Department. This is below the 2 percent target, meaning there is not a need to increase interest rates to control inflation. Given that core inflation averaged just 1.6 percent over the last six years, the economy could even withstand short bouts above 2 percent. Remember two years ago the Federal Reserve clarified the inflation target is not a ceiling.

There is recent precedent for taking a pause on rate hikes to see where the economy is heading. When similar financial pullbacks occurred at the beginning of 2016, the central bank slowed its policy normalization plan accordingly. It should do the same today. Powell considers anecdotal reports from small business owners when he makes decisions on rate hikes. “You pick things up sooner talking to business people because they start to feel it, and then it shows up in the data,” the chairman said.

I can agree as someone who talks to small business owners on a daily basis. While small business owners are still overwhelmingly confident with the state of the economy, I am increasingly hearing rumblings that planned investments have become more expensive due to recent rate hikes. These expenses so far have not been significant enough to dissuade business decisions, especially with the tax cut tailwinds this year, but if they continue to rise with the federal funds rate they might.

Small business owners and workers across the nation were the biggest victims of the slow growth years following the Great Recession a decade ago, but they are the biggest beneficiaries of the economic boom today. They deserve a Federal Reserve that will let this bull market run longer.

Alfredo Ortiz is president and chief executive of the Job Creators Network.

Tags Business Donald Trump Federal Reserve Finance Jerome Powell White House

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