3 Reasons Why It Would Be Stupid to Raise Rates At This Point

The odds favor the Federal Reserve beginning to raise interest rates in September. The recent troubles in Greece and China may have reduced those odds slightly. But, the betting money is still on a rate increase.

However, while I think that interest rates have been too low for too long and that this low-rate atmosphere has artificially propped up the market, raising them now might be a stupid move.

Here’s why:

Growth stinks. Despite a huge amount of money printing in recent years, economic growth has been relatively weak. And it’s not about to get much better.

In fact, the Organization of Economic Cooperation and Development (OECD) recently downgraded its forecast. It now expects U.S. growth to be 2%. Back in March its expectation for the year was as high as 3.1%. That’s a big haircut to their estimate.

Over in Europe the expectation is just 1.4%. And while there’s talk of raising rates here in the U.S., economic growth is such a global concern that other countries such as Denmark and Sweden have cut rates below 0%. I admit I didn’t realize interest rates below 0% was even possible. It doesn’t make sense. That’s how silly this has all become.

Unemployment is worse than you think. While the unemployment rate plastered on the front page is 5.3%, if you add up the people looking for work, plus part time workers for economic reasons, and other factors, the unemployment rate is more like 10.5%.

The lowest unemployment rate is for people 55 and up. The future of our economy – our 20 to 24 year-olds – are unemployed at a 9.9% rate. Add to this that real wages have been stagnant for years, and you have a major economic problem.

The U.S. dollar is strong. And it’s about to get stronger. In 2008, the Trade-Weighted Dollar Index was at a multi-decades low of 71.36. It’s up 36% since then. When the crisis occurred in late 2008-09, the dollar soared.

Since a strong dollar impacts exports, it probably would have been impossible to reach the OECD’s original growth estimates of 3.1%. This puts U.S. manufacturers in a position where they’ll have to slash prices to move product and compete with foreign companies.

Problem is, as investors flock to the U.S. dollar for safety in the face of another global crisis, that’ll make American goods less and less attractive to foreign companies. That will hurt U.S. companies – and our economy – even more.

Still, while it might be completely careless to raise rates at this point, there’s still a good chance the Fed will do it in September. But if they do, it won’t be by much, and the hikes could be few and far between.

John Signature
John Del Vecchio
Contributing Editor

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Categories: Interest Rates

About Author

In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.