The U.S. Federal Reserve has decided not to raise interest rates, despite the fact that the economy has been gaining strength. Economist Megan Greene has advice for how to handle the decision.
ROBERT SIEGEL, HOST: Not yet - that's the call today by the Federal Reserve. Short-term interest rates are going to stay right where they are near zero at least until the Fed meets again next month. Part of the reason for staying put - questions facing the global economy, especially China's slowdown. For reaction to the Fed's inaction, we turn to Megan Greene. She's managing director and chief economist at Manulife Asset Management, and she joins us from Boston. Welcome to the program once again.</s>MEGAN GREENE: Thanks.</s>ROBERT SIEGEL, HOST: First, what do you think about the Fed leaving the rates untouched?</s>MEGAN GREENE: I think it was absolutely the right call and for two of the reasons that Yellen actually cited. One was that there seems to be a lot of slack lesson left in the labor market. And secondly, she's concerned about events happening outside the U.S., and I think that's the right way to look at things.</s>ROBERT SIEGEL, HOST: You mentioned the labor market. Three years ago, the Fed said it would hold rates near zero until unemployment fell below 6-and-a-half percent. It's now 5.1 percent. What makes the Fed so much more cautious than they thought they would be by this time?</s>MEGAN GREENE: Well, technically, the Fed has ticked off one of its two mandates, which is the unemployment side of things. But it hasn't come anywhere close to achieving its target on the inflation side of its mandate. That's its second mandate.</s>MEGAN GREENE: Inflation is around 0.2 percent. That's well below the Fed's target of 2 percent. And even if you strip out lower oil prices, it's still not quite at 2 percent. And I think that Yellen is afraid that as the U.S. dollar continues to get stronger, actually, the U.S.'s biggest import will be deflationary pressures. And also, you know, Yellen has said that she thinks that oil prices are transitory, but oil prices have been low for quite a while now. So at what point does transitory become actually the new normal?</s>ROBERT SIEGEL, HOST: Megan, you have to explain that a bit more. The Federal Reserve actually wants there to be more inflation than there is right now. Why?</s>MEGAN GREENE: That's right. There's sort of a sweet spot for central banks on inflation. If inflation is too high and prices are rising too quickly, people can't afford to buy things. But if it's too low, then, actually, people will wait to buy things because they can put it off, especially if there's deflation. It will get cheaper in the future, so they might as well wait. And both are bad for the economy. So the Fed would like to see prices rising at about 2 percent year on year.</s>ROBERT SIEGEL, HOST: They decided at their September meeting to keep things as they are. What's likely to change so much next month that they wouldn't make the same decision obviously?</s>MEGAN GREENE: Well, I don't think anything will change in the next month. In fact, I don't think anything will change in the next few months. I think that probably, we'll continue to see slack in the labor market, and we'll continue to see inflation stubbornly stuck on the floor well into next year.</s>MEGAN GREENE: And I think that, you know, people are looking towards the Feds' next meeting - October, now - for the next hike. I don't think it will happen in October, least of all because there's no press conference scheduled to explain it. And the Fed needs to manage the message really carefully.</s>MEGAN GREENE: But I don't think it will happen at the next meeting in December, either. I think the Fed may well have to wait until next year to start hiking. And then you look at the fact that, you know, GDP data's always really bad in the U.S. in the first quarter, so the Fed might have to wait through that. And eventually, there's an election coming, so there are a lot of considerations.</s>ROBERT SIEGEL, HOST: So for people in the financial sector, today was like NFL draft day for football fans - something like that - big deal. Who was really thrilled with this, and who's upset about it today?</s>MEGAN GREENE: Well, I think that, you know, borrowers are thrilled with this. Anybody with a mortgage, anybody, you know, having stumped up their house as collateral for a loan is excited about this because they're borrowing costs will continue to be lower. Savers and investors, on the other hand, won't be thrilled about it. The reality is, though, that most of us are both borrowers and savers, actually. So in net, it's hard to say exactly how we all come out.</s>ROBERT SIEGEL, HOST: Megan Greene, managing director and chief economist at Manulife Asset Management, spoke to us from Boston. Thanks for talking with us.