The Instigator
bglueck
Con (against)
Losing
0 Points
The Contender
lannan13
Pro (for)
Winning
2 Points

Resolved: The Federal Reserve Should Raise Rates

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Post Voting Period
The voting period for this debate has ended.
after 2 votes the winner is...
lannan13
Voting Style: Open Point System: 7 Point
Started: 10/20/2015 Category: Economics
Updated: 1 year ago Status: Post Voting Period
Viewed: 914 times Debate No: 81205
Debate Rounds (4)
Comments (5)
Votes (2)

 

bglueck

Con

Topic: The Federal Reserve Should Raise the Federal Funds Target Rate
My Side: The Federal Reserve Should Not Raise Rates
Focus: Domestic welfare and global financial stability

Rounds:
First Rd: Definitions (Con); Acceptance (Pro) [Unusual, I know, but easier since Im proposing the debate]
Second Rd: Opening Arguments
Third Rd: Rebuttals and Arguments
Fourth Rd: Rebuttals and Conclusion

Rules:
1) Cite sources of all non-common knowledge information within character limit using in text links or parenthetical citations
2) Any economic indicator that is released by a U.S. Government organization (Federal Reserve, Bureau of Economic Analysis, Congressional Budget Office, etc.) and is verifiable (more than two sources report the same indicator) will be considered common knowledge and thus does not need to be cited.
3) Any economic indicator publically released after the beginning of the first round of debate cannot be used during the debate (List of economic indicators and calendar of release: http://www.newyorkfed.org...)
4) Specify the details of any economic indicator used for sake of verifiability (ex. Inflation is 1.9% as defined by the Core CPI, reported on a YoY basis for the month of September)

Scope: Obviously the Fed will raise rates again at some point, so the focus of this debate will be the next six months. The October, December, January, and March FOMC meetings are the applicable times when the Fed could raise rates for the purpose of this debate.

Definitions:
United States Federal Reserve Act: An Act To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. (http://www.federalreserve.gov...
Federal Reserve Act Official Title)
For the purpose of this debate, "The United States Federal Reserve System" will be synonymous to "the Fed," "The Federal Reserve," or any comparable terms.

U.S. Federal Reserve System Monetary Policy Objectives: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. (http://www.federalreserve.gov...
Federal Reserve Act Section 2a- 12 USC 225a)

Open Market Operations: Any Federal reserve bank may, under rules and regulations prescribed by the Board of Governors of the Federal Reserve System, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this Act made eligible for rediscount, with or without the indorsement of a member bank. (http://www.federalreserve.gov...
Federal Reserve Act Section 14-12 USC 353)

"Rates" (As seen in debate topic): The Federal Funds Target or Effective Rate as established by the Federal Open Market Committee.

Predefined Acronyms:
U.S.: United States
FOMC: Federal Open Market Committee
CPI: Consumer Price Index
PCE: Personal Consumption Expenditures
PPI: Producer Price Index
FFR: Federal Funds Rate
NAIRU: Non-Accelerating Inflation Rate of Unemployment
USD: U.S. Dollar
YoY: Year over Year
QoQ: Quarter over Quarter
MoM: Month over Month
lannan13

Pro

I accept.
Debate Round No. 1
bglueck

Con

The United States Federal Reserve Bank (the "Fed") is the apolitical institution that is in charge of controlling the monetary policy of the United States, doing so with three main tools: the reserve requirement, the discount rate, and open market operations. The latter of those tools is the most unique, mainly because it is controlled by the Federal Open Market Committee (FOMC), a special committee comprised of leaders of the Fed across the nation that makes decisions about where they think the Federal Funds rate should be according to current economic conditions. The Federal Funds rate is the prevailing rate in the United States that is the base for many other interest rates including, but not limited to, bond yields and interbank overnight loan rates. The Fed controls interest rates using open market operations, which at its most basic is the buying or selling of government bonds in an effort to either expand or contract the money supply, respectively.
In a world where everything has a price, so does money. Normal assets are valued using money as the common base, but the price of money is actually interest rates. In this respect, money acts like any other good or service in that its price, interest rates, are a function of supply and demand. When the Fed buys bonds through open market operations, they are giving people money for their bonds which functions to expand the money supply. This could be represented in a simple supply and demand graph as a rightward shift to supply, which drives down prices, in this case interest rates. Because money is the base for all other goods and services, increasing the money supply not only decreases the price of money, but increases the price of all other goods due to the reduction in price, and therefore purchasing power, of money itself.
The Fed uses open market operations to control interest rates in order to help keep the economy healthy, or to improve it when it is not. In times of economic turmoil, like in recessions, the Fed will lower interest rates in an effort to encourage investment spending, characterized by purchases of long term plant assets and usually financed with loans whose cost is based off of the interest rates that the Fed sets; encourage exports through a weaker dollar; and discourage saving, which can be characterized by keeping money in banks, and thus not changing hands in business transactions that increase consumption spending. All these effects of lower interest rates have the effect of increasing the factors that contribute to Gross Domestic Product (GDP), and thus have the effect of increasing GDP itself in hopes of leading to economic expansion again. In times of a bustling economy rates will be risen in order to control inflation and prevent bubbles in certain markets from forming, which can lead to recessions if "popped", like the housing market bubble did immediately preceding the past recession.
While the basis behind controlling rates appears simple in theory, in practice the challenge is not whether to raise or cut interest rates, but when to raise or cut them, and by how much. Changing interest rates is a game of momentum. When interest rates are already falling, it is easy to keep cutting them, as that is what the public expects. Switching between expansionary and contractionary policies, however, is very difficult because it causes uncertainty which inherently hurts the economy as investors do not have confidence when they are not certain what will happen. A change in monetary policy requires careful attention to macroeconomic indicators in order to make sure the timing is right, as changes in interest rates in either direction have costs and benefits. In the case of the current decision in front of the Fed, the situation is further complicated by negative economic outlook in foreign markets, and confounding factors that drive the macroeconomic indicators. Currently, the most important macroeconomic indicators driving the debate on whether to raise rates or keep them low are unemployment and inflation.
In this debate, I aim to focus on why the Federal Reserve should not raise rates within the next six months. As an overview of current U.S. macroeconomic indicators, currently inflation, as measured by the CPI in percent YoY, is at 0%. Unemployment is at 5.1%, with the Natural Rate of Unemployment (NRUE) at 5.06%, which is the rate of unemployment predicted when the economy is at full capacity. The unemployment figure actually therefore looks promising, as unemployment is extremely close to its natural rate. The biggest reason for raising rates at this point in time is due to inflation. Normally, after extended periods of low interest rates, the Fed will raise rates in order to fight inflation. The reason inflation becomes a problem is that the Fed keeps interest rates low by buying bonds in the open market, which functions to increase the money supply as people are receiving money for their bonds, which in turn causes inflation. Inflation is currently at 0% though, which is dramatically lower than the Fed's target rate of 2%.
Currently, the domestic economy is not functioning at its most efficient capacity. Industrial production has recently decreased by .2% MoM showing a decrease in demand for industrial goods and commodities, and has a net negative effect of GDP. Another indication of domestic business performance is Business Inventories, which have increased by $700 million since last month indicating that there has been a decreased demand for goods relative to what businesses had anticipated. Retail sales increased .1% MoM, missing economist estimates of a .2% increase which shows that consumers are simply spending less money.
All of this considered, I now turn to theoretical economic analysis to estimate the impact of an increase in the FFR. Increasing the FFR means that interest rates for debt will also increase. This will make Investment Spending, one of the four components of GDP, decrease because it will make investments, like purchasing a car or a home more expensive, more expensive as a result of interest expense. Increasing the FFR will also increase the yields on treasury bonds, short term bonds affected most directly. Short term bonds like the 3 month, 6 month, or 1 year treasury bill act as the domestic "risk-free rate", which is the basis for valuing currency foreign exchange rates. All else equal, If U.S. "risk-free" bonds increase in yield, more foreign investors will seek to purchase them, which is done by exchanging their currency into USD and then purchasing the bonds. This will increase the demand for USD, thus increasing the price, as represented by stronger exchange rates with foreign currencies. A stronger USD means exports are more expensive since U.S. goods are more expensive relative to foreign goods, and imports will be cheaper because foreign goods will be cheaper relative to domestic goods. This will have a net effect of decreasing net exports, another factor of GDP. Since consumption spending is generally cyclical and not a function of interest rates and government spending is controlled by fiscal policy (consumption spending and government spending being the other two factors of GDP along with investment spending and net exports), all else equal, an increase in the FFR will decrease domestic production as measured by GDP. This, in conjunction with the previous review of current business indicators, does not make for a compelling reason to raise interest rates since raising interest rates will stunt the already lagging domestic economy through decreasing domestic spending. A stronger USD will also cause domestic corporate profits to fall as there is a decrease in exports, which will most likely lead to employees getting laid off, increasing the unemployment rate that is already so good.
Besides the domestic economy, the Fed also has to consider foreign influences. China has recently been undergoing a fundamental change from a state-backed, industrial based economy to a market-backed, consumer based economy. This has resulted in their manufacturing output decreasing, representing a fall in demand for commodities worldwide as China is the primary purchaser of commodities, which serve as industrial production inputs. This, along with their recent devaluation of the Yuan, has caused a great amount of uncertainty about the Chinese economy, causing theirs and our equity markets to crash in August. Foreign market volatility and uncertainty would be exacerbated by an increase in the FFR, which already causes investor uncertainty, and most likely result in a large market correction that the Fed is worried about.
The FOMC's long run goals and monetary policy strategy are defined by the Fed as "The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates" (http://www.federalreserve.gov...).
In its effort to promote maximum employment (the unemployment rate equal to the natural rate of unemployment) and stable prices (inflation equal to 2%), it is not currently in the interest of the Fed to raise the FFR as I have shown that an increase in the FFR will have a negative impact on unemployment, and reduce inflation even further, going directly against the goals of the FOMC.
"Should" is defined by Merriam-Webster as "used in auxiliary function to express obligation, propriety, or expediency" (http://www.merriam-webster.com...). If "should," as in the title of the resolution "The Federal Reserve Should Raise Rates," implies an obligation of the Fed to raise rates, then this would just be simply contradictory to the main goals of the FOMC, and thus false a false statement.
lannan13

Pro

I thank my opponent for his pateince. This round I shall post my opening arguments then move on to refutations in my next round.

Contention 1: The economy has recovered hence interst rates can go up.




Since the 2008 crisis the economy has been in shambles as a result the Federal reserve (the Fed) has lowered interest rates to encourage spending and investment. This is the reason that the Fed lowers rates in the first place. [1] From the Mid 1990s to late 2000s the US has seen the greatest economic growth in it's history. Post 2008 Subprime crisis, we have seen a gradual growth rate in the US to the point to the US's GDP and growth rate has returned to pre-crisis levels effectively ending the crisis in the US as we have finially come out of the Crisis. [2] The reason that the interest rates were not raised this summer was due to the Chinese currency manipulation crisis and how it wrecked havoic on the Asian economy. Though the Chinese crisis harmed much of the Asian economy it had little effect in the US and the fact is that the Chinese manipulation and their actual currency value have been following a corrilative path, so there wasn't much of an issue that has occured. The US survivng this crisis was a test to the American economy showing its strength on the matter, not a weakness. [3]



When it has come to Big Cities we have seen a massive improvement rate since the crisis and even the people living there seem to agree. When it comes to the stats we can see that none of the big cities annouced worsend or no change conditions and 40% in medium sized cities reported Significant improvement since the crisis. [4]

We can see that since the whole point of lowering rates is to help improve the country out of a crisis and since I have shown that we are offically out of the crisis then we can see that these 0-0.25% interest rates on no longer needed. If they stay low as they are and do not turn within the next 6 months then we will have a full blown crisis on our hands.

Contention 2: Low Rates will Cause economic termoil

There are several issues that will occur, but in this contention I will only get into a few. The reason, as addressed in the previous contention, is done to fight off recession. With the interst rate near zero since 2008 the federal reserve does not have the tool to fight off recessions making the US economy very vunerable and possibly open to a crash worse than that of the one in 2008 of which I intend on getting into this round. [5] The first issue triggering this crisis is that of low investments. With low interst rates people haven't been able to make much money when saving their moeny in the banks. Another key issue is people on pension plans are being hurt in this case as under these low rates their funds are as low as ever and this has been occuring since 2008 harming these senior citizens which is a key and important part as this has caused and will continue to cause a burden on families by having to provide for their parents if this continues which will continue to harm the economy due to a reduction in spending by consumers which was one of the reasons behind the Great Depression.



Secondly, we have asset prices. Since savings and pension plans are failing people have been turning away from that to more riskier investments in costly assets. [6] With people already having less savings and all their hopes are on this risk when it comes crashing down people will be taken advantaged and the economy will crash harder than it did in 2008. This has already been seen cracks in the much of these assests which is already costs millions of dollars to many Americans. [7] This will lead to a repeat of the 2008 Subprime crisis, because just like then mortages are low from these interest rates and when they actual begin to rise there will begin the entire cycle all over again and the federal reserve has nothing to do to fight that.


Sources
1. ( http://www.investopedia.com...)
2. (http://alphanow.thomsonreuters.com...)
3. (http://www.moneyandmarkets.com...)
4. (http://blogs.wsj.com...)
5. (http://www.federalreserve.gov...)
6. (http://www.riksbank.se...)
7. ( http://www.npr.org...)
Debate Round No. 2
bglueck

Con

In this round, I intend to first address my opponents contentions, and from there expand my original argument. For sake of simplicity, I will address each contention individually.
On contention 1, "The economy has recovered hence interest rates can go up," I would mainly like to address the relation between the U.S. and Chinese economies. Looking at a time series of events, it is clear that there are strong relations between the two economies. On August 11th, the Chinese government allowed the Yuan to be devalued. The value of the Yuan is usually pegged to the value of the USD, done so by the Chinese government buying USD and selling Yuan to keep their currency artificially weak, helping them maintain a competitive advantage in exporting goods. On August 17th through August 26th, both the Chinese and U.S. equity markets crashed. On August 26th, the Yuan was essentially repegged to the dollar, peaking at an exchange rate (Yuan/Dollar) of 6.422 from 6.33 two weeks earlier. This coincidentally corresponded to a recovery of both Chinese and U.S. equity markets. My point here is that it is clear that the Chinese economy is weakening, but because both equity markets rebounded, I argue that the recovery of the equity markets was less fueled by simply having stronger economies capable of recovering, but by the Chinese government restoring certainty in the value of the Yuan on August 26th.
Stating that the economy has "recovered" since the financial crisis is somewhat of a generalization. In many aspects, I agree that the United State's economy is in a period of expansion, but there are many confounding facts that make this argument harder to make. Going back to the issue of inflation, one of the main goals of the Fed, who aim to keep the economy stable, is promoting stable prices. This infers an inflation rate of 2%, but right now inflation is at 0%. This is unhealthy for an economy because it infers no growth, or even suggests negative growth in prices could be coming. Short term (1M and 3M) bond yields in the U.S. are currently zero, or negative if you look at market prices. This infers investors expecting deflation, because an investor would only agree to receive negative yield if they think that deflation will devalue their money even more than the negative return on a bond. This is certainly not a characteristic of an economy operating at full capacity. An economy operating at full capacity has rising prices, aka inflation. If the Fed were to raise rates now, inflation would decrease even more, and deflation could risk the economy dipping into another recession. GDP is the main indicator of recession and GDP is determined by the total cost of final products produced in an economy. By definition, total cost is directly dependent on the prices of goods and if the prices of goods are going down, so is the total cost of all final products produced in an economy, which will decrease GDP growth as well, which indicates an economy contracting. Raising rates right now seriously risks the U.S. economy slipping into recession again on the basis of inflationary pressures, making it a very risky move.
On contention 2, "Low Rates will Cause economic turmoil," which has its argument centered around the creation of asset bubbles from low interest rates, asset bubbles are not necessarily a result of low interest rates, and even asset bubbles are not a huge issue of concern in respect to the larger goals of the FOMC, addressing unemployment, inflation, and rates. For example, to look at gold, gold prices have a negative correlation to those of equity markets, because as equity markets do not perform well, or as the economy is in recession, people have a desire to own real assets, like gold, which have actual intrinsic value rather than money, which is fiat in nature. Interest rates do not cause this, but investor uncertainty causes precious metals to increase in price when the economy is contracting. The subprime crisis was a result of a housing bubble, but the housing bubble can be directly tied to interest rates in that the reason the Fed lowers interest rates is to increase investments, specifically for houses and automobiles. The housing bubble, and further, the subprime mortgage crisis, was caused by poor regulation however. Subprime loans were given out to people on a NINJA (No Income, No Job, no Assets) basis, meaning that anybody who wanted a mortgage could basically have one. This, in conjunction with largely unregulated, newer financial products such as Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDO), and Credit Default Swaps (CDS), lead to a financial crisis when people started defaulting on their subprime loans as interest rates were cut. These subprime loans were packaged (technically, securitized) into MBSs, which were packaged into CDOs, which had CDSs written on them, which is essentially an insurance policy against something. Firms like AIG were glad to write CDSs on these CDOs and MBSs while times were good, because they were pocketing insurance premiums while the risk of default seemed very low. When subprime mortgages began to be defaulted upon en masse, AIG had to pay large insurance payouts, which lead to their collapse and bailout, but CDSs were also written on AIG, which triggered a large scale financial system failure. Now, regulations are in place regarding getting subprime mortgages, how CDS markets are structured, and how MBSs and CDOs are rated, which largely prevents the same situation from occurring again. The housing bubble therefore did not cause the financial crisis, and further the recession, but speculations in the form of buying CDSs amid non-transparent financial securities caused the crisis. I therefore argue that asset bubbles are of lesser importance and relevance to the Fed's decision to raise rates.
Further expanding my argument against the Fed raising rates, another thing to be considered is the size of the Fed's balance sheet. The Fed had to borrow massive amounts of money in order to spur an economy recovery after 2008. The interest that they have to pay on this debt is directly related to the FFR, so by raising rates the Fed risks the United States not being able to pay their liabilities. The U.S. is seen as the most risk free borrower in the world, so this has huge financial implications if the U.S. were to be unable to pay off their debt in a manageable way any more. This is a large consideration, and was cited in the September FOMC meeting minutes as one of the reasons against raising rates.
Continuing looking at the September FOMC meeting, the median long term GDP forecasts among FOMC members and Federal Reserve Bank Presidents has decreased. The central range of predictions in June were from 2%-2.3%, but now Fed members are predicting GDP long term growth to be 1.8%-2.2%, a significantly lower forecast. Inflation is also not predicted to be 2% until 2018 now, up from the Fed's 2017 prediction in June. Considering this, it seems inappropriate to raise rates at this time as long term economic growth forecasts are largely worse by the leading economic experts in the country.
lannan13

Pro

Contention 1: Economic Recovery

My opponent concedes tha the economy is recovering, but argues that raising rates will increase deflation and harm investors. Though this may be true the truth is that inflation will begin to rise again when the Oil market begins to stablize. [1] Chairman of the Federal Reserve Janet Yellen showed that the main reason behind this issue was the Oil and a strong dollar. Though the issue here is already starting to resolve as the International Engery Agency has found that the supply of oil on the market is starting to be tightend and that prices are on the rise again. [2] This already solves the issue of inflation as this will occur within the time limit allotted and will lead to a rise in inflation which will show that the economic growth will continue.



Contention 2: Low rates cause economic turmoil

My opponent claims that lower interest rates do not cause bubbles, but yet that it incorrect.

it – πt= r* t + α(πt – π) + βgapt

If we observe the Taylor's Rule as shown above we can see that inflation needs to rise 1/1 of that of inflation over time. If neutral rate is constant over time and inflation are zero then we are fine, but that is not true as economic data has shown that it has averaged out at 2.5% since 1981. This means with current output growth is falling we can see that it would be at -3. [3] This will result in a movement away from equalibrium at 1.5% which is bad as is since economic wise we want to get as close as we can to equalibrium. This is shown that if these rates continue the way they are they are to create asset bubbles as people continue to look elsewhere and you'll see more bust than boom and when this occurs the entire economic system would collapse.

I extend across all other impacts brought up.



My opponent brings up the $16 trillion bailout the Federal Reserve carried out in 2008. [4] The thing is that this money will be quite impossible to pay off on it's own and the US must raise rates before we get into another economic crisis. You have to take my impact over his since mine is not only larger since the Federal Reserve has no means of countering this one, but this will likely collapse the world economy into a Great Depression and will be something of the likes that Rep Ron Paul has been warning for the past few years. This is the exact thing that we need to worry about. There are several issues we can take to solve Con's impact, but unless my plan is implamented we can see that there is no doubt that the economic system will collapse. As for the inflation-growth disadvantage we can still see that there is a direct link to Oil Prices with are rising again which shows that this argument is nullified.



Sources
1. (http://www.wsj.com...)
2. (http://www.reuters.com...)
3. (https://www.cdhowe.org...)
4. (http://www.bloomberg.com...)
Debate Round No. 3
bglueck

Con

bglueck forfeited this round.
lannan13

Pro

All points extended.

Please vote Pro!
Debate Round No. 4
5 comments have been posted on this debate. Showing 1 through 5 records.
Posted by lannan13 2 years ago
lannan13
Mind holding off a few days before you respond?
Posted by lannan13 2 years ago
lannan13
I'll probably get to this tomorrow.
Posted by bglueck 2 years ago
bglueck
@lannan13 Yup I just changed it
Posted by lannan13 2 years ago
lannan13
Can you extend the argumentation to 72 hours? I have quite a busy schedule for just 24 hours.
Posted by lannan13 2 years ago
lannan13
I agree.
2 votes have been placed for this debate. Showing 1 through 2 records.
Vote Placed by famousdebater 1 year ago
famousdebater
bgluecklannan13Tied
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Reasons for voting decision: ff
Vote Placed by tajshar2k 1 year ago
tajshar2k
bgluecklannan13Tied
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Reasons for voting decision: FF