Is an Interest Rate Hike Overdue?

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Is an Interest Rate Hike Overdue?

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November 18, 2015

While I’m reluctant to attribute movements in stock prices to specific events, this article says that the big run-up in stock prices (around 1.5%) today was due to the release of the Federal Reserve’s minutes of their last meeting indicating that “a core of officials backed a possible rate hike in December.”

The conventional wisdom is that lower interest rates boost stock prices, and that one of the drivers of the healthy stock market since 2009 has been the Fed’s low interest rate policy. I don’t disagree with the conventional wisdom in general. Lower interest rates tend to raise asset prices. But in this case investors seem to believe the Fed maintained that low interest rate policy too long.

The conventional wisdom emphasizes lower borrowing costs of low interest rates that promote investment, but tends to overlook the fact that interest rate manipulation often leads to the wrong types of investment, causing events like the dot-com bubble in the 1990s and the housing bubble of the 2000s.  Austrian macroeconomics emphasizes the malinvestment that is caused by interest rate manipulation.

Investors seem to be more attuned to these Austrian ideas than most macroeconomists, and have the right reaction to the news that the Fed is likely to raise interest rates.  The fact that the news has boosted stock prices should make the Fed less reluctant to make the right move.

We'd be even better off if the Fed were unable to manipulate interest rates at all, but I don't think it's realistic to think that will happen prior to their December meeting.

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