Resolved: The Federal Reserve Should Raise Rates

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.