Predicting date of next Fed rate increase is a 'fool's errand,' economist says

LAWRENCE — Federal Reserve officials indicated this week raising interest rates in June was off the table after recent weak economic data, but in national news reports, they said hikes in future months are still possible.

A University of Kansas professor is available to discuss issues surrounding the Fed's decision on rates in the future.

Bob DeYoung, the Capitol Federal Distinguished Professor in Financial Markets and Institutions in the KU School of Business and a former Federal Reserve economist. DeYoung is a senior research fellow at the FDIC’s Center for Financial Research and co-editor of the Journal of Money, Credit and Banking. He is a leading scholar on performance, practice and regulation in the banking industry. 

Q: What will be significant economic indicators to watch for between the signal of a potential increase and the actual decision in June?

DeYoung: The May jobs report was weak. Recently, home construction indicators have weakened. Our trading partners in Europe and Asia also have weak economies.  Hourly wage growth is showing signs of life but remains short of robust. Inflation is still lower than the Fed wants.

Our economic expansion is slow and fragile. Under these conditions, the Federal Reserve would normally be considering rate reductions, not rate increases. But with rates so close to the zero lower bound, the Fed is looking for any justification for a return to policy normalcy.

Q: What is the economic significance of not raising the rate this month after last week’s lackluster jobs report?

DeYoung: We should not read much significance into a Fed decision to not raise rates at the June meeting. Absent the onset of a U.S. recession, the Fed will almost certainly raise its interest rate target at least once in 2016. At which Federal Open Market Committee meeting this will happen? That kind of prediction is a fool’s errand.   

Q: Can you provide a big-picture analysis on what a rate increase in June would mean after so many years of zero-interest Fed rates?

DeYoung: Fed rate increases this year and early next year will have very little effect on the real economy. Any Fed rate increases will be small, just a quarter point at a time. Financial markets will take these increases in stride. Businesses and households currently borrowing at adjustable rates will experience small and gradual rate increases over the course of a year.   

In the longer run, the health of our economy depends mainly on two things: the health of our major trading partners and the continued existence of unused domestic labor resources. 

When growth returns to Europe and Asia, increased demand for U.S. exports will spark our economy. Increased demand for U.S. workers will push up wages and household incomes — but any inflation from this will be tempered, at least for a time, by previously discouraged U.S. workers returning to the labor market.

To arrange an interview with DeYoung, contact George Diepenbrock at gdiepenbrock@ku.edu or 785-864-8853.