The Federal Reserve Should Raise Rates Immediately

I agree with Cato’s Mark Calabria on the need for the Fed to raise interest rates. Here Mr. Calabria lays out the rationale for an increase.

To help the economy, the Federal Reserve should begin raising rates immediately and bring its preferred policy rate, the federal funds, to a more neutral stance. The Fed’s current rate policies have not delivered economic growth or employment and should be abandoned in favor of policies that would.

The theory behind the Fed’s current rate policy is that lower rates increase the demand for borrowing, which should fuel both credit-driven spending and investment. This however, only examines one side of the market: demand. For credit to expand, lenders must be willing to lend at those rates as well, but current rates barely cover a lender’s inflation risk without also covering the risk of not being repaid.