Economy Not at Maximum Sustainable Growth

By Kelsi Maree Borland |

LOS ANGELES—In the wake of the Fed’s decision to leave interest rates alone, the industry has erupted in a debate about whether the move was good for the economy or not. Nelson Rising, the chairman and CEO of Rising Realty Partners and the former chairman of the San Francisco Federal Reserve Bank, wasn’t surprised by the decision based on past legislation that requires the economy be in a position of maximum economic growth.

“I was not surprised by the Fed’s decision,” Rising tells “The Humphrey Hawkins Act of 1978, approved by both houses and signed by the president, provides that the Fed of Open Markets Committee should attempt to have monetary policy to achieve maximum sustainable growth consistent with price stability, meaning inflation. With inflation under 2% and oil prices dropping, inflation does not appear to be a concern. Given the fact that GDP projected growth rates for the balance of 2015 have been revised downward for a variety of reasons, we are not yet at the point of maximum sustainable growth.”

However, Rising doesn’t think that the economy is lacking the stability for a nominal rate increase. “Given the fact that we participate in the worldwide economy and the slow growth rates in the Eurozone and the recent decline of equity and real estate values in China, the Fed’s accommodative interest rate policy can offset many of the pressures on the global economy,” he says.

There are some negatives to keeping rates so low. The most notable is the impact on savers, who are seeing incredibly low returns on money that is sitting in a bank account. For retirees, this is especially upsetting. “The biggest negative impact of low interest rates is that retirees will be receiving lower returns on their 401K investments and other safe investment strategies,” Rising says.

His prediction, though, is that interest rates will increase before the end of the year. He expects that they will start going up in December, and that the increase will be nominal. “In Chairman Yellen’s report to both houses of Congress in July, she made it clear that the decision to raise rates would be on a meeting to meeting basis and that if there was going to be an increase, it would be small,” says Nelson.

Not everyone agrees that the Fed made the right decision. In a recent economic update speech at the Allen Matkins View from the Top conference, Michael Van Konynenburg, the president of Eastdil Secured, said that the Fed should have increased rates, questioning if the low interest rate environment would turn into an asset bubble.