Should the Federal Reserve Raise Short-Term Rates or Not?

NEW YORK (TheStreet) -- The Federal Reserve has a tough year ahead and the fast-restructuring global economy is not going to help.

The big dilemma facing Fed officials is when to start raising short-term interest rates. Right now, bets are on June or September, though an increasing number of investors seem to be betting that the rise won't take place until September.

There are two reasons for this belief. The Fed has indicated that it has two things it is watching that will be important in deciding when to make its move. The first is about the labor market and how fast it continues to improve. The second is the inflation rate and how fast it begins to increase.

Right now, Federal Reserve projections seem to give little cause for concern on either of these fronts. The growth rate of real GDP is not expected, at a maximum, to rise above 2.7 percent through 2017. Unemployment, at a minimum, is expected to decline but not below 4.8 percent. And, inflation, at a maximum is not expected to rise above 2.0 percent as late as 2017.

All those numbers add up to no hurry in raising rates. 

Another factor may also seem to weigh on the side of postponing any rise in short-term interest rates: the value of the United States dollar. 

Two weeks ago, it seemed as if the rise in the value of the dollar may have peaked, but the last four days of last week turned that feeling around. One of the reasons was that investors became more hopeful that the Fed would start raising short-term rates earlier than September; that is, a June rate rise was still thought possible. 

So, what is the Fed to do? 

There are quite a few people, like Keynesian economist Alan Blinder, that believe there is no real hurry on raising short-term interest rates. With little or no pressure on inflation, there is little or no pressure on the Fed to move and by not moving monetary policy will continue to help the employment situation. He concludes, "This is a time for patience." 

Following this advice will provide very little additional help for the economy but should be good for the stock market in the near term. 

Over the longer-term, leaders in Washington, D. C. are going to have accept the fact that the world is changing and that the country cannot be run in the same way it has for the past fifty years. There are two new data points to add to this argument. 

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