The prospect of an imminent interest rate hike was officially declared dead on Monday, when Janet Yellen, chairwoman of the Federal Reserve, said in a speech that today’s low rates were “generally appropriate” given “uncertainties” in the economy.
As Fed leaders go, Ms. Yellen is a straight talker. But to cite “uncertainty” as the reason for holding rates steady is putting it very politely. The most plausible reason to hold rates steady is that the economy is not strong enough to withstand a rate hike and there is no sign that conditions will meaningfully improve any time soon.
On the day of Ms. Yellen’s speech, the Fed released its Labor Market Conditions Index, a monthly measure of employment health that guides Fed policymaking. According to the index, conditions have been increasingly negative every month so far this year, hitting a post-recession low of -4.8 in May.
Before that five-month slide, the index had been in positive territory nearly every month since the recovery began in mid-2009. The only exceptions were shallow contractions in May and June of 2012 and in March of 2015.
Historically, when the index has trended down as it has of late, the Fed has either reduced rates or held them steady. There is no doubt about that.
The real uncertainty is what the Fed can do if the deterioration continues. With rates already so low, dropping them further would have little effect. Instead, it would be largely up to Congress to do what it should have been doing all along: spending and investing to offset insufficient demand from consumers and businesses.
In the meantime, speculation about the next rate increase is off base. The logical question to ask now is how to boost the economy, not when to slow it down.