On Tuesday, markets go on hold to wait and see if the world ends on Wednesday -- well, to see if the federal funds rate, an obscure interest rate hardly anyone in the real economy pays for credit, goes up by a whole one-quarter of a percentage point, to as high as a stratospheric 0.75%.
Both critics and supporters of the Federal Reserve's extremely easy money policies have given it too much credit (or blame) for the 158% jump in the stock market since March 2009. Instead, the 168% gain in corporate profits -- through the first quarter, per S&P Capital IQ strategist Sam Stovall -- should get most of the credit. The S&P 500 has moved from 666 at the 2009 bottom, reached the day The Wall Street Journal's op-ed page argued that "Obama's Radicalism is Killing the Dow," to 2,139.12 on Monday.
But there has been one huge missing element in the expansion that made these profit gains happen: business confidence. A boost in business confidence would help close the giant gap that remains between the level of corporate investment we have and the one we should have.
That's why the Fed should take a page from Franklin Roosevelt. The only thing this expansion really has to fear is fear itself. Stop the hand-wringing over every last piece of mixed data and begin treating this expansion as the solid, if less than soaring, thing that it is.
It's impossible to know whether shifting the Fed's tone toward one of steady confidence will nix the overweening sense of false drama that periodically sends markets veering between risk-on (buy stocks!) and risk-off (sell nearly everything!). But it's time to find out whether a corporate sector that is liquid and near record profits can be coaxed into making investments it can plainly afford.
In other words, raise rates already.
The Fed probably won't. Futures markets see only a 12% chance that rates will go up this week, and a 45% chance that the central bank won't even hike at the December meeting of its Open Market Committee.
The arguments are, by now, familiar. The expansion has been as slow and drudging as it has been long. It's the third-longest expansion since World War II at 85 months, trailing the 92-month 1980s expansion and the 102-month recovery that began under George H.W. Bush and sustained Bill Clinton's presidency.
Counting discouraged workers and people involuntarily stuck in part-time work, unemployed and underemployed workers are 9.7% of the work force. That's about three-fourths of a percentage point above full employment. Median household incomes are still 1% below where they were in 2000, after inflation.
OK, we get it. But how about this?
Median real incomes are up 9.3% since mid-2011, including a 5% jump last year. Unemployment is at 4.9% -- just about full employment. The 181,500 jobs the economy has been adding per month this year are more than twice as many as are needed to keep that rate moving lower. (A few months back, I cited estimates that the rate would reach 4.5% in the fourth quarter -- that's still about right).
And rising consumer confidence and spending have plenty of gas in the tank.
Consumer spending rose at annual 3% rate in the first half, including 4.4% in the second quarter. That has been great for retail stocks like Amazon (AMZN) as well as left-for-deaders like Kohl's (KSS) , Nordstrom (JWN) and even Macy's (M) . More importantly, there is plenty left where that came from, economists from Moody's Analytics argue.
On top of rising incomes, U.S. households have notably-strong balance sheets. That, plus a seven-year drop of new unemployment-insurance claims to near-record lows, augurs well for consumers to keep spending, Moody's says. "Household debt loads have never been lighter,'' Moody's chief economist Mark Zandi wrote.
Only 10% of the average household's after-tax income is going to debt service, down from a record 13.2% in 2007. That debt service percentage is as low as it has been in data going back to 1980, Zandi wrote. The trend reflects both a reduction in mortgage and credit card debt and rock-bottom interest rates that households have largely locked in.
This is good for America -- and for General Motors (GM) , Walmart (WMT) , Expedia (EXPE) , and pretty much any company that depends on the U.S. consumer. The jobs outlook is strong and there is the prospect for further gains in real incomes as wages rise and oil prices remain low. This economic progress is not going anywhere.
The challenge now is to convince businesses to invest against these solid consumer prospects. Investment has actually been declining for the last three quarters, and has been well below healthy levels throughout the expansion. One reason: business leaders continually find reasons to doubt that end demand for products would be there. And they perceive political risks (policy makers in Congress and elsewhere could scare the markets). In the U.S., at least, those concerns shouldn't apply any more.
The Fed's preferred method of giving reassurance -- keeping rates near zero until all possible signs of even transitory weakness are eliminated -- has run its course.
Consumers don't need the reassurance. Emboldened by cheap credit, they've moved back into car buying. They've even reentered the housing market, whose continued issues are mostly about low business confidence that results in tight credit and scant new-home inventories.
The Fed's approach doesn't work on business. Business credit is easily available. The bond markets are wide open, and companies (outside of energy) have plenty of profits to invest. Corporate debt service is consuming only 15% of cash flow, Moody's said. That's half what debt service cost around 1990.
Instead, the Fed should instill confidence by showing some.
A steady but modest course of rate increases would leave rates very low by any normal historical standard, and would keep consumers liquid enough to drive growth. That's especially true if rate hikes are coupled with an analysis of the economy that reflects its very substantial progress and reassures markets that slightly more expensive money won't kill the party.
Higher rates would boost the dollar some against global currencies. But a China that's less shaky than in late 2015 may help U.S. companies overcome the dollar's impact on exports.
A little bit more government-led investment in roads and buildings could also create demand for capital goods. And since the Fed is, de facto, the world's central bank now, global markets may also respond well to a show of confidence from Washington.
Some last-minute minority sentiment this week maintains that the Fed could raise rates after all. But given the skepticism of Open Market Committee members Dan Tarullo and Lael Brainard, I think the consensus-seeking Fed will hold off.
The super-cheap money of the last seven years has done its job, which was to get consumers off the sidelines. The economy's remaining problems are different -- and demand a different remedy than ultra-low rates.
See full coverage and analysis of the Federal Reserve's decisions on interest rates.