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Is it still too early to raise interest rates?

Will the Federal Reserve raise interest rates next month? It's a much debated question amid some good U.S. economic news, as well as the Chinese market turmoil. As the Fed meets for its annual retreat, Judy Woodruff takes a closer look with Greg Ip of The Wall Street Journal.

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  • JUDY WOODRUFF:

    The good economic news out today adds yet another layer of complexity to a crucial decision that could affect millions of American households. Will the Federal Reserve Board finally raise interest rates next month?

    It's a much debated question, one that's taken on new urgency given the market turmoil of late, worries over China and more. It's also the subject of much attention at the Fed's annual retreat now under way in Jackson Hole, Wyoming.

    Greg Ip follows this all closely as the chief economics commentator for The Wall Street Journal. And he joins us again.

    Great to have you back, Greg.

  • GREG IP, The Wall Street Journal:

    Hi, Judy.

  • JUDY WOODRUFF:

    So, there are all these arguments growing louder every day, yes, raise rates, no, don't raise rates. And then you had just yesterday the president of the New York Fed, an influential man, William Dudley, saying now there is a less compelling argument. What is he talking about?

  • GREG IP:

    Well, it really is a crucial decision moment for the Fed.

    They have had interest rates at zero for basically seven years now in this effort to try and get a badly beaten-up economy growing normally again. And when you look at things like the unemployment rate, they have succeeded. It's down to 5.3 percent. That kind of looks normal. And you have these abnormally low interest rates.

    So almost all the officials on the Fed have felt all year that the time would be right by the fall to start raising interest rates up from zero. But what changed in the last few weeks? Well, one of the things that's not normal is the inflation rate. It's still too low for the Fed's taste.

    With what we have seen in the last few weeks, we know a couple things. The price of oil has fallen. The dollar has gotten stronger and some things that we import will get cheaper, so inflation is going to go even lower. And it looks like a very tender time in the financial markets.

    Those two factors suggest that maybe it's still a bit too soon to start moving interest rates higher.

  • JUDY WOODRUFF:

    But you do have the argument — I saw this just today — the Kansas City Fed president, Esther George, said because the U.S. economy is fundamentally strong, the Fed shouldn't hesitate to go ahead and raise rates.

    And you had those new GDP numbers we cited earlier in the program, strong growth earlier this year.

  • GREG IP:

    Absolutely.

    If you were just looking at the situation of the U.S. economy alone, this would be a no-brainer. As you say, we had very good GDP numbers for the second quarter, 3.7 percent annualized growth. We have now seen data for the month of July and we know that factory activity was quite good. Employment was very strong. You have even seen housing sales. All these things tell us that the U.S. economy is doing just fine and what's going on in the market really is just a market event. So if they could somehow put that aside, then really they shouldn't feel that nervous about starting that process.

  • JUDY WOODRUFF:

    How do you see the Fed dividing up on this? Obviously, they're not talking openly about this, Greg, but how do you see the — what kind of a conversation are they going to be having about this?

  • GREG IP:

    So, you can divide Fed officials, of which there are 17 or 18, I think, now, into three groups.

    You have the hawks, who will always think that they should start raising rates. Ms. George could be considered one of those. You have doves, who think that the Fed should always be slow to raise interest rates. And then there is a group in the middle that is always looking carefully at every last data point, and they're not sure.

    And that group of people, who is led by Janet Yellen, the chairwoman, is right now undecided. If you look at where the markets are, they believe that the odds of a rate increase at their meeting next month have gone from well over 50 percent to now around 25 percent.

    And I think that they're betting that when Janet Yellen looks at the troubles in the markets out there, the likelihood that inflation is going to go lower, rather than higher, she's going to say, maybe not now, maybe we will think about this in December instead.

  • JUDY WOODRUFF:

    Well, we pointed out she's not attending this conference, this Fed conference at Jackson Hole. Her vice chairman, Stanley Fischer, is there. And there was a story today about he was walking past some of these protesters.

    There's a liberal group called the Center for Popular Democracy that's holding protests all weekend out there. Is that something that can influence these Fed governors, or do they just look the other way?

  • GREG IP:

    They have heard these arguments on and off for several years, both from groups on the more liberal side who have felt strongly that the Fed needs to do more to get the economy growing faster, unemployment lower. This would be very good for people's wages.

    We have even heard Larry Summers, who isn't exactly a bleeding-heart liberal, making that case in the op-ed pages this week, that this is exactly the wrong time to raise interest rates. But there are people on the other side of the argument — in fact, some of those people will be out there at Jackson Hole offsetting the cries to stay at zero to say, no, no, no, now is the time to start moving rates up, you're doing more damage with these ridiculously low interest rates than you're helping.

    So they have pressure on both sides.

  • JUDY WOODRUFF:

    Well, we have a few weeks to go before they meet to make this decision one way or another, but it's never too soon to start talking about it.

  • GREG IP:

    Yes, absolutely not. What else would we do? What else would we have to talk about?

    (LAUGHTER)

  • JUDY WOODRUFF:

    Greg Ip with The Wall Street Journal, we thank you.

  • GREG IP:

    Thank you.

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