The stock market just blew up the last argument for the Fed to raise interest rates

The hawks at the central bank no longer have a theoretical leg to stand on

U.S. stock market
(Image credit: REUTERS/Lucas Jackson)

Since the Federal Reserve dropped its benchmark interest rate target down to near zero in the fall of 2008, a chorus of critics has deployed a shifting variety of arguments for raising the rate immediately. Back in 2009 and 2010, it was looming inflation. When that failed to materialize — when inflation actually remained at historic lows — they moved on to a projection that the recovery was heading toward escape velocity. With rates so low for so long, catch-up growth was just around the corner (remember "green shoots?"), and therefore the Fed must raise rates to stay ahead of the curve.

While the economy is stronger now than it was in 2011, economic and job growth have consistently been weak at best. So the critics have settled on another argument: the risk of financial instability. In this view, low interest rates will cause people to "reach for yield" — i.e. pour money into high-yielding assets — leading to a bubble in risky assets and another financial crisis.

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Ryan Cooper

Ryan Cooper is a national correspondent at TheWeek.com. His work has appeared in the Washington Monthly, The New Republic, and the Washington Post.