The Federal Reserve has been giving the economy strong medicine ever since the 2008 financial crisis, but now it's beginning to reduce the dosage. The central bank, under Chair Janet Yellen, has been pulling back on its monthly bond purchases that have been pumping money into the economy. And, at some point the Fed will start lifting interest rates out of their bargain basement.
But when will that happen? And how should investors and consumers prepare for that inevitable day?
In this week's podcast, Mark Hamrick, Bankrate's Washington bureau chief, interviews:
- Lindsey Piegza, chief economist of Sterne Agee, who makes the case that the Fed may raise rates later, rather than sooner.
- Michael Cox, director of the O'Neil Center for Global Markets and Freedom at Southern Methodist University's Cox School of Business and the former chief economist for the Federal Reserve Bank of Dallas. He argues that the Fed needs to be clearer about what it's thinking.
Also, Bankrate's Doug Whiteman offers some tips on how to "stack" the cards in your wallet, so your use of plastic leaves you least vulnerable to fraud.
When will the Fed raise rates?
Interest rates can't stay super-low forever. So, what are the clues on when the Federal Reserve will start nudging them higher again?
From Bankrate.com, This is "Your Money This Week."
I'm Mark Hamrick in Washington.
If we'd said a decade ago that much of what would happen in the economy would be shaped by the Federal Reserve, it would be a fair guess that some folks wouldn't believe it. But in the years during and after the financial crisis, low interest rates have been a key determinant of the economy's path -- for better and for worse.
The Fed under Chair Janet Yellen envisions an upward slope for benchmark interest rates beginning sometime next year.
If rates do rise, what does it mean for the rest of us?
We'll speak with Michael Cox, former chief economist for the Federal Reserve Bank of Dallas, who's critical of the Fed's management of the economy.
And Lindsey Piegza, chief economist for Sterne Agee. She does a terrific job of explaining where we are with the economy and where we might be going.
All of that and more coming up on "Your Money This Week."
To give the economy a nudge, the Federal Reserve has been buying assets. As we head toward the end of the year, those asset purchases are winding down and likely ending.
That's on the path toward what the Fed hopes will be putting its own policies into more of a "neutral" setting.
Our first guest is Lindsey Piegza, chief economist for Sterne Agee, a financial services firm based in Birmingham, Alabama. To begin, I asked Lindsey about what the Fed's decision to end asset purchases means for the economy in the near term.
Lindsey Piegza: Well, I, I think this is a good sign. I think this says that the Fed is getting ready to remove accommodation. Now, not in the near term. But they're starting to slowly wind down some of those unprecedented policies in place, meaning those outright asset purchases of both longer term securities and MBS. So, this is widely expected to end in the October month with a one final reduction of $15 billion. And then the Fed has committed to an extended period between an end in QE and the first Fed rate hike. But again, I think this is a step in the right direction, signaling to the market that the Fed is slowly getting ready to move away from their accommodative stance.
Mark Hamrick: Well, and to that point as you know earlier this year, uh, Chair Janet Yellen said the first interest rate in years could come as soon as six months after those asset purchases end. And that would translate to the first half of next year. Do you think we could get the first rate hike in that first half next year?
Lindsey Piegza: Well, we certainly could. But -- and, and this is a big but -- but we'd have to see the labor market improve substantially. Now, Janet Yellen said that we could see the first Fed rate hike within six months. We also could see the first Fed rate hike within -- or, excuse me, not until two or three years from now. The Fed is remaining very data-dependent. And it all depends on the pace of the recovery in the labor market. Right now, looking out at the labor market and the very lackluster pace of recovery, I think it's very reasonable that we would expect the Fed to wait longer to raise rates rather than that sooner six-month period.
Mark Hamrick: OK. So, if we see that is -- even as long as two to three years off into the future, it becomes even more difficult to envision what's going on at that time. But how do you think generally the economy ought to respond to rising rates when we do see that happen?
Lindsey Piegza: Well, assuming that the economy is strong enough to support the Fed removing that accommodative stance, meaning raising the Fed's funds rate, I think that we should see a, a slow pull-back in inflationary pressures but a continued momentum in underlying growth, again, assuming that the, the economy is strong enough to withstand that rate hike. If the Fed moves too soon, and I think this is the primary concern of the chairman right now, if the Fed moves too soon, they could undermine any growing momentum that we're seeing in the economy at this point.
Mark Hamrick: As you know, uh, Lindsey, Chair Yellen has largely dismissed the fear that, uh, essentially asset bubbles are building as these rates remain at these record-low levels and that the balance sheet is at $4 trillion dollars and counting. What's your sense about what the risks are from what the Fed's been doing? And do you think this is something that, uh, people should worry about? Uh, and I don't mean just central bankers.
Lindsey Piegza: Well, I, I'm not too concerned. I think I'm -- I would agree with Chair Yellen that we're not quite seeing the asset bubble creation that a lot of economists are fearing, simply because we're not seeing that flood of cash out into the marketplace. I think right now the Fed is very well-positioned to keep their eye on the labor market. That's really where we need to see the growth. And that's my biggest concern.
The fact (is) that we are seeing plus-200,000 in terms of growth in the headline employment number, but that's not translating into full-time job creation, which is further not translating into wage pressures or giving the consumer more purchasing power out in the labor market. So, I think the Fed is very correct in their focus on the labor market and not financial market stability at this time.
Mark Hamrick: Lindsey, some fierce critics of the Fed would say, uh, they don't see the connection between essentially record-low interest rates and how you get someone who is -- does not possess the appropriate skill-set to be employed, how they attain those skills any better through low interest rates. And it may be a fair question to ask to the extent of, you know, can you actually solve the remaining problems in the economy by continuing to hope the monetary policy can achieve that? What would your answer to that be?
Lindsey Piegza: Well, I think traditionally, yes. You, you think about Fed policy, and the intention is to draw down interest rates to zero. That sparks the investment cycle: Small businesses, individuals, they take on cash; they put that out into the marketplace; they grow their business; they ramp up hiring; and they draw down the pool of available labor.
Now, if you want to take on an additional employee, they might not have that required skill-set. And so, businesses then have to offer training opportunities in order to grow their employment base.
So, that's really, the focus then: to get business development to such as point where we've drawn the pool of available labor and where we ramp up not only pressure on wages, but also training opportunities. But you're very right. We're not seeing that out in the economy. There remains a very large skills mismatch. And what do I mean by that? Well, there's a tremendous amount of vacancies in terms of employment out in the labor market. But the individuals applying for those jobs don't necessarily have the training needed to fill those vacancies.
We saw in the most recent Fed Beige Book that there's openings in IT, accounting, craft labor, engineering. But the skills that are out in terms of the unemployed right now don't necessarily fill those vacancies. So, I think that's -- that was a two-part answer. But I think we're seeing a lot of disconnect in terms of traditional monetary policies sparking long-term employment growth and that lingering skills disconnect that's not applying to the current labor market needs at this point.
Mark Hamrick: Oh, it was a good answer, Lindsey, because it is complicated. And it requires at least a two-part answer. So, I appreciate that. And then to broaden it out even further, let's say for consumers, borrowers, even investors, does the presumption that we have a changing rate environment, or at least an environment where monetary policy is changing, does all of that suggest that they should look at those potential transactions that they'll be engaging in any differently than they did before?
Lindsey Piegza: Well, you know, this is interesting. Because we've been sitting at the zero interest rate for a number of years now. And again, it hasn't sparked that traditional credit cycle. So, it, it's almost as if now the Fed may have to think outside the box and almost imply a counterintuitive policy instrument here in terms of raising rates before we see that credit cycle take hold.
So, it's almost as if we need to provide a self-fulfilling prophecy, meaning that the Fed may signal to the market the economy is strong enough, we're going to raise rates maybe 25, and maybe 50 basis points in order to encourage consumers and investors that it's safe enough to move out into the marketplace. So, we may need to move outside of those traditional measures to get that credit cycle going.
Mark Hamrick: Well, certainly here at Bankrate, we bemoan all the time the fact that savings rates are abysmally low. And I think if nothing else, those people who've been looking at certificates of deposit as perhaps providing measly returns, they may welcome that change in the environment at minimum, right?
Lindsey Piegza: Certainly, you know, and what we continue to harp on the one side of the lending handle, meaning: Why aren't banks lending to credit-worthy borrowers that come to their doors? But, on the other hand, banks are saying: Well, why don't we raise the interest rates so we can get enough deposits into the banks, so that we have ample capital to lend out into the marketplace?
So, it is a little bit of double-edged sword, or a chicken and egg conundrum. But I do think that at this point, the Fed may benefit from that counterintuitive monetary policy: raising rates before we start to see that innate growth in the fundamentals.
Mark Hamrick: Well, it would be nice to have some unintended benefits of raising interest rates. Lindsey, it's always a pleasure to speak with you. Thanks so much for your time.
Lindsey Piegza: Thanks for having me.
Mark Hamrick: Lindsey Piegza. She's chief economist for Sterne Agee. She spoke with us from her office in Chicago.
For our next segment, we get more of an insider's view of the Federal Reserve.
Michael Cox is now director of the O'Neil Center for Global Markets and Freedom at Southern Methodist University's Cox School of Business. Previously, he was chief economist for the Federal Reserve Bank of Dallas.
Most members of the Federal Open Market Committee, the Fed's policymaking body, have indicated that they expect to raise rates in 2015. I asked Michael about his call for the Fed to have some rules guiding its decision making and why?
Michael Cox: Well, to make it easy for markets to predict what they are going to do. If you look historically, the best performing times of the U.S. economy -- they have been times when the Fed adopted more of a rules-based approach monetary policy, than just letting policy be conducted at the whim of whoever happens to be on the board.
Mark Hamrick: Right, and is there a sense now that, let's say, financial markets as well as all of the rest of us are sort of flying blind as we are trying to anticipate what the Fed will or will not do?
Michael Cox: I think so. I think we have been flying blind ever since Bernanke -- when there were inclinations that Bernanke was going to be leaving. If you look at markets immediately after that, markets started to go down as the expectation of the interest rate was that it was going to go up. And the party seemed to be over -- market fell, then Janet Yellen came in and people were: Who is Janet Yellen? Let's figure it out. Is she the happy Janet, the dove Janet? Or is she going to be the tough one like Paul Volcker was in the past, who raised rates to get us out of the inflationary period started by G. William Miller. She turned out to be the Janet we knew of from yesterday, acting more like the labor secretary than the Fed chairperson. She has taken rates back down, but all of this just creates a lot of unnecessary gyrations in markets, because in the long run, we cannot keep interest rates at historical low levels, or if we do, we are going to be like Japan.
Mark Hamrick: Well, and some might argue we have already been like Japan, given the fact that the financial crises essentially hit full bore in 2007, here we are seven years later, right?
Michael Cox: Right. I completely agree with that. I believe that there is a good argument to be made that the central bank of the United States, i.e. the Fed, has been co-opted by government. I mean the Treasury and I mean Fannie and Freddie, who would like for the Fed to keep interests rates low so they can sell their bonds, and even the big banks. Much like the central bank of Japan got co-opted by the Treasury there. In Japan, government did a 265 percent of GDP. Interest alone on the debt is like 30 percent, a third of GDP. So if the central bank there were to let interest rates go back up to normal levels, it would bankrupt the government. So, there is a central bank who is operating monetary policy for the good of another part of government and not the economy.
Mark Hamrick: Let's get back to the rules question, Michael, not that we really strayed away from that. If you did have such rules, what might they look like?
Michael Cox: If you go back to around 2002, the Fed had started to drift away from a rules-based approach. The rule was to say something like: Let us keep the fed funds rate at a rate which is determined by how far the inflation rate is away from its target value and also how far GDP growth is away from its target value. Some even added how far the unemployment rate is away from what we think there is a natural level. If you do those kind of rules-based approach based on the things that the Fed is supposed to be trying to control -- inflation, GDP growth and maximum sustainable unemployment -- then you would get a Fed funds rate today that is in the 2 to 3 percent range, not 0.16 basis -- you know, 16 basis points. So the rule would have to do with GDP growth, inflation and unemployment.
Mark Hamrick: Let me ask you about this. One point that you made is one we harp on quite a bit here at Bankrate, and that is how low interest rates have made things really difficult for savers. Just frame that for us a little bit.
Michael Cox: You know, what does the government do? We need more savings, we need to just save more. So go out and say: What is our encouragement on saving? It is interest that we get to keep. Now the government had discouraged us in the past by taxing our interest at the normal income tax rate, but today there is hardly even any interest. So we are having a kind of redistributionist monetary policy: money taken from the rich and transferred to the poor, because people who borrow -- people who have money, tend to be the wealthy ones and they make good choices their whole life. They sacrifice, they save, they started a business, they hired people, they did what it took to bring a good product to market and make it affordable for everybody to voluntarily buy it. In return for all that risk-taking, effort, and hard work and so on, just thinking about it, what do they get? They get some profit. They get some savings, which they can put somewhere and hope to earn interest on it. But the government is just saying, thank you for doing that, but we are not going to give you any return on it. We are going to keep interest rates low, and you'll basically just have to live off your principle. That is a punishment for making good choices. Do we really want to punish people for making good choices? That is what is happening.
Mark Hamrick: Well Michael, it is always an interesting topic to talk about, and you have a unique insight on and through the Federal Reserve. Thanks so much for your time.
Michael Cox: Thank you, Mark.
Mark Hamrick: Michael Cox, Director of the O'Neil Center for Global Markets and Freedom at SMU's school of business. He spoke with us from Dallas.
It seems like it happens about once a week that we hear about a new situation where a website's usernames and passwords have compromised. And there's also the problem with stolen credit and debit card information.
Bankrate's Doug Whiteman takes a look at how you can gauge the risks associated with your own plastic.
Credit and debit card fraud hits millions of Americans each year. You can protect your wallet from card fraudsters by being savvier about the plastic that you use.
Some card categories can be more vulnerable. For example, using a debit card is generally riskier than using a credit card because a debit card takes funds directly from your bank account, and if fraudulent charges are put on your card, you could be liable for $50 of the loss if you don't report the issue within two days. If you fail to report it within 60 days, you could be out $500.
A traditional magnetic stripe card is more susceptible than one of the newer "EMV" cards with an embedded chip. Also be aware that you might be safer with some card issuers than with others. While it's true that hackers tend to target large financial institutions, the smaller fish might have less security and weaker fraud prevention.
For more on the most vulnerable credit cards in your wallet, visit Bankrate.com. I'm Doug Whiteman.
If we were to ask you how any of President Franklin D. Roosevelt's "New Deal" programs affect you today -- how might you answer?
The answer is fodder for "This Week in Business History."
On August, 14, 1935, FDR signed the Social Security Bill into law after promising a plan meant to safeguard what he called "against the hazards and vicissitudes of life."
Social Security still serves as a source of important income in retirement for millions of Americans, and likely for more years to come.
You've been listening to "Your Money This Week."
For more on this and other personal finance issues, visit Bankrate.com. Thanks to producers Lucas Wysocki and Amanda Rowe for their work in the studio, and also to editor Doug Whiteman.
I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.