Meetings of the Federal Open Market Committee – the group of economists who meet to set interest rates eight times a year – are often pretty uneventful. Indeed, this could well be the world’s most boring chart:
Since 2009, the Federal Reserve has set interest rates by announcing a “target range” for something called the federal funds rate. And for the entire history of that “target range," it hasn’t budged: the upper limit is 0.25%, and the lower limit is zero.
But nothing lasts forever, and today’s meeting was a knife-edge thing: no one knew whether the Fed would (finally) raise rates or not.
In the end, the committee decided to stay put. The result: that chart is as boring as it’s ever been.
Was this the right decision? The short answer is: yes, it was. And I would have said that even if the committee had decided to hike.
The fact is that the United States is blessed to have pretty much the best possible rate-setting committee. I’m not the world’s greatest expert on monetary policy, but I know who is, and you really couldn’t get a better or more qualified group of people than this:
Janet L. Yellen, Board of Governors, Chair
William C. Dudley, New York, Vice Chairman
Lael Brainard, Board of Governors
Charles L. Evans, Chicago
Stanley Fischer, Board of Governors
Jeffrey M. Lacker, Richmond
Dennis P. Lockhart, Atlanta
Jerome H. Powell, Board of Governors
Daniel K. Tarullo, Board of Governors
John C. Williams, San Francisco
Yellen was by far the best choice for the job of leading the committee, and she’s at her very best at times like this, when she can be deliberative and collegial and thoughtful, taking her time, learning from her committee, and making sure that she arrives at the correct conclusion. She’s also blessed to have some of the wisest people in the world on her committee: Stan Fischer, for instance, has mentored generations of central bank governors and literally wrote the book on macroeconomics.
This committee is in uncharted territory: the Fed has never raised rates from zero before, and is dealing with a pool of money which has grown almost unimaginably since rates were last at nonzero levels. (As Binyamin Appelbaum explains, the federal funds rate used to measure the rate of interest on some $10 billion that banks had on deposit at the Federal Reserve. That sum has now risen to $2.6 trillion.) The risks on both sides are large and, largely, unknowable. Raising rates could scupper the confidence needed to keep American companies hiring new people, while not raising rates risks fueling a dangerous financial bubble whose bursting could have catastrophic consequences.
The committee also brought a lot of much-needed intentional clarity to the markets. There are only two more meetings this year, in October and December, and yet 13 of the 17 participants continue to say that a rate hike will come in 2015. If and when the Fed does raise rates, the news will come as a surprise to absolutely nobody, and that’s exactly as it should be.
In other words, there’s no need to worry about monetary policy under this Fed leadership. We’re in the best possible hands, and there’s almost no chance that a well-signaled rate hike will have significant negative effects on either markets or the broader economy. Zero-interest policies aren’t normal, and we’ll slowly start getting back to normal at some point. So sit back, and relax. The ride should be a smooth one.