There is a possibility that the economy has become dependent on cheap money to keep consumption flowing. In fact, experts point to the consumer as the main driver of growth in the economy right now. Companies have refused to take advantage of the low rates to increase their investment. This means that without cheap money, consumers might also start tightening their spending and the economy could revert its growth trends.
Nevertheless, the perils of prolonged low rates far surpass the risks of gradual tightening. With an increase of just 25 basis points in September, the Fed can test the waters and analyze how the economy responds. It is now clear that waiting for inflation to pick up is not the right move given the circumstances. Cheap money will only drive risks of bad credit accumulation up, and consumers are already stretching themselves beyond their means.
There has been a decrease in savings during the last few months, along with all the good news about job growth. This is at least partly due to the fact that yields are so low, that there is absolutely no incentive to save. This will hurt the economy in the long run, which means that the Fed must also reconsider its policy in light of the malaise they could be creating a few years down the road. In the meantime it seems that stellar job growth will not make the Fed budge. All those joining the labor force now will simply be out of incentives to save and build a better future.
