Arkansas economists weigh in on Wednesday’s Fed meeting on rate hikes

Arkansas economists are nearly unanimous that the Federal Reserve will raise interest rates for the first time in nine years at Wednesday’s at the Federal Open Market Committee monetary policy meeting, but opinions vary on how those hikes will affect growth in Arkansas and across the broader U.S. economy.

Here’s are the highlight’s of interviews on Tuesday with some of the state’s most prominent economists ahead of the FOMC meeting that begins at 2 p.m. on Wednesday.

Kathy Deck, director of the Center for Business and Economic Research at the Sam M. Walton College of Business at the University of Arkansas in Fayetteville.

Presumably when they raise, I actually think the effects will be fairly muted. They have been signaling for quite some time their intention that they want to “normalize” rates as quickly as they can in a prudent manner, and of course they’ve delayed several times but they signaled very strong that in December this is ‘really, really it.’

So everybody has had a lot of time – and by everybody I mean investors, the general public and traders – to digest how to handle an interest rate rise.

I think (the Feds) are looking at the balance of risk right now and saying that the data thinks that they can be normalized without destroying the economy or job growth, and that is really their goal.

I think we are well into this economic expansion and when I do think about how … might this interest rate rise affect Arkansas, the way that would be most profound if it strengthens the dollar further versus another currency and makes our manufacturing exports more expensive. That might have some detrimental effect (on manufacturing), which as you well know has been under duress even as the rest of employment in Arkansas has been rising. So I think that this presumable interest rate hike won’t help that situation.

Michael Pakko, chief economist and state economic forecaster at the Institute for Economic Advancement at the University of Arkansas at Little Rock

The Fed is widely expected to start raising rates soon – if not this week, then certainly early in 2016. In my opinion, it’s about time. Interest rates have been held abnormally low for several years now. The whole idea of an ‘easy’ monetary policy is that in the short run, the Fed can temporarily boost economic activity by lowering rates. But economists generally agree that monetary policy cannot boost economic growth or employment in the long run.

And there are two dangers of maintaining a low interest rate policy for too long: First, it tends to reinforce the public’s view that we are experiencing an abnormally weak economy – after all, if the economy were doing well, why would the Fed be so persistent in its stimulative stance? Another, more dangerous possibility is that a low (or even zero) interest rate environment becomes the ‘new normal.’

St. Louis Fed President Jim Bullard has recently commented on this danger, noting that a persistent low-interest rate environment implies an equilibrium that we don’t know much about, and could be associated with a very bad outcome.  The experience of Japan over the past two decades—where a long-run equilibrium with low interest rates is associated with low growth and deflation—is definitely something to be avoided.

Whether the Fed makes a policy change this week or early next year, I do not anticipate any immediate impacts on the economy. The move is widely anticipated, so it will not catch financial markets off guard. The Fed’s incremental approach to interest rate policy means that the first step will be tiny, followed by a long, gradual process of letting rates rise to a more normal level. If anything, the beginning of an upward move in interest rates might stimulate some investment and consumer spending. For example, in real estate markets we are likely to see demand temporarily surge as home buyers seek to finance their purchase before mortgage rates eventually peak.

John Shelnutt, director of economic analysis and tax research at the state Department of Finance and Administration

I expect a small rate hike by the FOMC with assurances that the Fed will take a ‘wait and watch’ stance in 2016 for any further rate changes based on additional signs of inflation and better than expected rates of economic growth. Their focus is on core inflation and not energy or other traditionally volatile components.

I doubt a small rate change in the near term will have much impact on the real economy, assuming there is stability and momentum to fundamentals of domestic growth.

Marc Fusaro, associate professor of Economics at Arkansas Tech University

I still believe that we are due for a rate increase, but I think it will not come until early 2016. The reason to raise rates is simply because they cannot stay this low forever. No other reasons to raise exist. What will eventually prompt the Fed to act is when some inflation exists. But PCE inflation from Q3-2014 to Q3-2015 is 0.27%. That is not the kind of inflation that pushes the fed to raise rates.

If they do raise rates, then we will not see another increase for a few meetings.

As you know, I am very concerned about the fall-off in commercial construction permits. I would expect a rate increase to further dampen construction activity. If the fed raises rates now, then it might hit the economy at exactly the wrong time for Arkansas.

Jeff Collins, Talk Business & Politics’ economist and former director of the Center for Business and Economic Research at the University of Arkansas

I think the Fed will take some modest action and incrementally move interest rates up. It is interesting because the Fed has taken a lot of heat for being too accommodating in regards to monetary policy. There are people who say that ‘easy money’ has created imbalances that can eventually only lead to inflation. From an inflation perspective, there really doesn’t seem to be a lot of obvious inflationary pressure in the economy, but there is definitely the perception that the time has come for the Fed to do something. Long answer to a simple question, I do expect the Fed to raise rates very modestly.

The fact that they will raise interest rates will have an impact on markets, so it will take some time – because people have been so used to cheap money – but there will be some reactions on the part of the markets. Anyone who is a borrower from a corporate perspective, analysts are going to figure out how that affects the cost of borrowing and how is it going to impacts profits for businesses.

Closer to home in Arkansas, I think the impact is going to be on consumers who use credit. For example, credits cards are tied to short-term rates, and the long-term rates are the kind of rates where you go to buy a car or a house, or some other large capital (purchase). Those are going to be long-lasting items where you are going to pay over a longer period of time, and the Fed can’t really manipulate very easily. But short-term rates are the kind that will affect people’s credit cards and I think the amount of the rate increase is going to be so small that it will have very little impact. The average person, I think, is not going to really feel it.