The Federal Reserve will be raising rates 0.25% today. It is a good thing for the U.S. and the world economy. I had the privilege to meet Janet Yellen at the Federal Reserve twice in the last two years with other prominent manufacturing leaders, and I told her that we should raise rates to grow the economy.
Here are the six reasons why raising rates now will help:
1. Get cash off sideline
Corporations and consumers are sitting on the side lines. They have checking accounts getting low rates of interest. They are pausing because things appear to be going sideways. If people connect that interest rates are rising, it will compel them to act. Spend cash. Buy robots. Invest in equipment and software and hire talent and urgently borrow money now before the rates go higher. If Marlin Steel's clients get off the sidelines and buy more equipment because rates are rising, we will need to make more baskets for these clients. I will have to hire more talent. That is good for our nation.
2. Signal inflection point
People want to "hear the gun go off." Good news-the economy has turned a corner and now is the time to get engaged. Nothing sends a signal like we used to cut rates because things are souring but now optimism should shine because we are about to tighten because things are going so well. This breeds confidence to move forward and clear the cobwebs of our economic decision makers.
3. Help savers and retired people
Fed policy over the last decade has pummeled savers. It is about time pensioners and savers are rewarded with rational interest rates. Every little bit helps a person on a fixed income and this new money will encourage saving. Low interest rates (in Sweden it is Negative!!) discourage savers and cripple our pensioners.
4. Stop bubbles
Absurdly low rates distort markets. Bubbles pop up elsewhere. Right now bonds are in a bubble-the easy money of the last decade is causing distortions starving small businesses of loans and pushing cash to government bonds. We need the market to take over and the Feds to step back so things get more rational.
5. Banks with incentives to lend
Low interest rates reduce banks interest in lending money to small business. They will be inclined with the current policy to sit on the cash or buy government bonds (see No. 4 above) and are discouraged to hit the streets and lend to our emerging entrepreneurs and small business which hire USA talent. Most new jobs are created by small business.
6. Shame the world to catch up
The EU and China are cutting rates to debase their currency. They should follow the U.S. lead as they watch our country strengthen with this pivot. They are sending the signal that their economies are declining which is a negative psychological spiral.
Time to raise since we are on the same trajectory as the USA which is up!