Interest rates: There's a looming problem with the Fed's way of thinking

Seeing things that aren't there. Exhibiting irrational fears. Babbling in confused double talk.

These could be symptoms scrawled in a psychiatrist's notebook. These could be the ravings of a dotty uncle.

Or, just as likely, these could be a sobering depiction of the mental state of some members of the Federal Reserve System.

They are Fed officials embracing delusions to justify higher interest rates.

They see full employment, a job for everyone who wants one. Any more hiring and the economy "overheats." That's an illusion.

They see inflation gaining momentum — at the economy's peril. Not happening.

Happily, Fed officials chasing phantoms still are losing the argument. Last week, the Fed leadership passed on a chance to raise interest rates. Unfortunately, there'll be another chance next month.

If accelerating inflation and a robust labor market were real, maybe they would be strong arguments for raising interest rates. Indeed, they are the only arguments for doing so, since the Fed proclaimed in 2012 that full employment and mounting inflation were the two triggers for ending the era of zero interest.

But Fed officials declaring victory over a distressed job market and defeat over inflation are flat wrong.

The U.S. economy still has a labor market that, beyond the headline numbers, remains weak.

The jobless rate of 5.1 percent sounds great — well below the average 5.8 percent from 1948 to 2015. Economists used to argue that any rate lower than 6 percent invited inflation, as companies paid more overtime and bid wages higher to attract and keep workers.

But the U.S. Labor Department's index of total hours worked fell 0.2 percent in September. Hourly wages were almost in sync with the pace of overall price increases in the economy.

Inflation? The index the Fed watches most carefully has been well below 2 percent for more than three years. Its last reading: 0.3 percent.

Experts can — and do — debate whether 2 percent inflation is an unreasonably low target for the Fed to raise interest rates. But advocates of higher interest rates have to squint hard, and cherry-pick data, to make the case that inflation is spiraling higher.

The prophets of inflation, who've been continually wrong for the past three, four or five years, bring to mind the lament of baseball players who fail to make the playoffs. Their case for inflation: "Wait until next year."

The classic definition of the role of the Fed is to remove the punch bowl when the economy gets too festive for its own good. But where's the party?

Clearly, the nearly 8 million unemployed and the 3.1 million who have given up looking for work were not invited. Neither were the millions of workers who have endured no raises, or pay cuts, over several lean years.

Americans have a lot riding on the decisions of the Fed, whether the average person knows it or not. What the central bankers do, or don't do, may affect whether ordinary people can afford a house or a new car in the years ahead. Whether they have a job or get a raise. Whether the value of the dollars in their wallets remains the same or shrinks.

Fortunately, the case against raising interest rates has prevailed over strong lobbies that stand to gain if interest rates head higher.

U.S. Bank CEO Richard Davis, earlier this year, announced cost-cutting and possible layoffs if interest rates don't rise soon. Other bankers across the country echoed those warnings.

Why do bankers care?

Bank profit margins — the difference between the cost of money they borrow and the revenue from money they lend — narrow when interest rates are near zero. When interest rates rise, it's an easy bet that what lenders charge borrowers will rise faster than the banks' cost of money.

Rising rates also could cause a stampede of house hunters to buy and lock in mortgage rates before those rates climb still higher. More profits for the bankers.

All good news in the short run, even if rising rates stall job growth and commerce in the long run.

In the long run, as economist Paul Krugman wrote, bankers end up on the golf course.

The most prosperous among us — the fabled "1 percent" — also have a big stake in Fed action.

Forget the archetypal passbook savings customer, if any still exist. The real money is in bonds — Treasuries and municipal bonds that track federal borrowing rates. On a household basis, the bulk of that booty goes to the very, very rich.

H. Ross Perot, a billionaire presidential candidate in 1992, reported bond profits of $240 million in the year before he ran.

Much of that money came from the rising value of bonds as interest rates fell. But the rest was simply pocketing interest.

But don't the richest of the rich fear a fall in the value of the low-interest-bearing bonds they now own when interest rates rise? Not necessarily.

Wealthy families can afford to hold onto bonds until they mature. Or, if interest rates rise high enough, their losses on bonds sold today will be more than erased by interest payments on newly purchased bonds.

Who wouldn't want to park millions in Treasuries, making 5 percent a year with no risk? Beats making 1.5 percent.

Without question, the Fed has reason to worry about interest rates remaining at or near historic lows for six years running. If an economic shock tumbled the nation into another recession, the Fed would be unable to lower interest rates. Zero is a boundary it cannot cross.

By its own standards — an uptick in inflation and a happily-ever-after labor market — the Fed has no reason to boost rates any time soon.

But you wouldn't know that listening to some Fed decisionmakers, a nervous lot with their fears fanned by a handful of powerful special interests. (Powerful special interests are defined as people with money, big megaphones or both.)

Marvel at this model of clear prose — passable for a central banker but a likely fail for an eighth-grade composition student:

"A prudent monetary policy based on traditional central banking principles would begin normalizing the committee's policy settings gradually, since the goals of policy have essentially been met," St. Louis Fed President James Bullard said in late September.

Translation: "Time to raise rates."

"I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring," Richmond Fed President Jeremy Lacker said recently.

Translation: "Me, too."

Atlanta Fed President Dennis Lockhart was ready to pull the trigger on higher interest rates in August, but by September was not so eager.

"It has to be considered an open question whether we move now or wait a little while," he said.

Translation: "Not now, but soon."

The leader of the central bank appears to be in their camp.

"It will likely be appropriate to raise the target range of the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective," Fed Chairwoman Janet Yellen said in September.

Meanwhile, central bankers from other countries are practically yowling for the Fed to raise rates.

A U.S. rate increase "would be a reaction to a better economy, and that would ultimately be good news for the world economy," the president of Germany's central bank said at an October meeting of the International Monetary Fund.

Other bankers at the conference cheered him on. Consider this gem, from the Wall Street Journal:

"This year, compared to a year ago, many emerging-market central bank governors and some others were keener that the Fed just get on with it, not because they were keen to see interest rates rise, but because they wanted to reduce uncertainty," said Tharman Shanmugaratnam, Singapore's deputy prime minister and former head of the IMF's governing committee.

Translation: "Do something! Even if it's a blunder."

The paper's headline described holding interest rates steady as "dithering." Yes, the Fed hasn't raised rates since June 2006. But between then and now there was the small matter of the worst recession in 75 years and a recovery that's been less than inspiring.

Why do other countries care about the action or inaction of the Federal Reserve?

Rising interest rates invite investors the world over to steer money into U.S. Treasuries. That would lift the value of the dollar against other currencies.

All other things being equal, U.S. products then become more expensive for foreigners to buy. U.S. exports fall. Conversely, a strong dollar gives Americans greater international buying power. U.S. imports rise. Great news in Germany, Brazil, China and another 160 or so countries.

That the Fed would raise interest rates seemed a certainty only a month ago. Now it seems more like a coin toss.

One voice for holding off on higher rates has come from Minnesota. Minneapolis Fed President Narayana Kocherlakota in recent years flipped from inflation hawk to a clarion of caution on Fed action that could throttle a struggling U.S. economy. But he's leaving the Fed at the end of this year.

So here's the score. Bankers, the very rich and other nations are itching for the Fed to raise interest rates. Some Fed officials are inclined to answer the call.

But this hasn't been their season. Thus far, the forces of caution — and reason — have prevailed.

In the parlance of baseball, "Wait until next year." Or maybe the year after.

Mike Meyers, a former Star Tribune business reporter, is a Minneapolis writer.