Could an ‘accident’ by Janet Yellen derail Clinton? A likely December interest-rate hike has Democrats feeling nervous, and analysts divided on the economy.

By Bin White

The general election is still almost a year away. But much about the economic picture that will frame the 2016 presidential race will come into focus in the next two weeks as the Federal Reserve prepares to raise interest rates for the first time in nearly a decade and the job market improves to levels not seen since 2007.
The overall backdrop — an economy that is strong enough for the Fed to start hiking rates — should favor Democratic front-runner Hillary Clinton.
But the first Fed move, which is widely expected to come on Dec. 16, presents a potential wild card that could roil global markets, slow U.S. growth and provide an opportunity for Republicans in an economy that retains significant structural problems that have left many voters deeply frustrated and casting about for tough-talking outsiders like Donald Trump.
“Back in 2008, the U.S. economy was in the emergency room and we have slowly emerged. We can walk pretty fast now but we are still structurally impaired and cannot run,” said Mohamed El-Erian, chief economic adviser at Allianz. “And the Federal Reserve action likely to come in December presents risks of both a policy mistake and a market accident.”
The policy mistake would see the Fed tightening the U.S. money supply while Europe, Japan and China are all easing credit, creating a global “divergence” that further drives up the U.S. dollar, hurting U.S. exporters and possibly creating big corporate defaults abroad for companies whose debt is held in dollars.

The “market accident” would see big stock price declines as investors decide profits can’t hold up without the Fed pumping easy money into the system. “I think there’s a high probability of an accident,” DoubleLine Capital portfolio manager Bonnie Baha said at a recent Reuters event in New York. “It’s like putting your foot on the brake when there’s no gas in the car to begin with.”
Many liberal Democrats have also warned the Fed not to act this year, noting limited gains so far in workers’ take-home pay and continued risks to the U.S. from global terrorism and other outside shocks.
Rep. Brad Sherman (D-Calif.) last month joked to Federal Reserve Chair Janet Yellen that God did not want her to boost rates before next year. “God’s plan is that things rise in the spring, and so if you want to be good with the Almighty, you might want to delay until May,” he said at a hearing.
But none of these potential problems are likely to hold up the Fed, which is bordering on desperate to exit from its current emergency footing and to start the process before the 2016 election year begins.
The dawn of the new economic age will begin this week, as Yellen speaks to the Economic Club of Washington on Wednesday and testifies before the Senate Joint Economic Committee on Thursday.
Yellen is widely expected to lay further ground work for a rate hike next week in both appearances. Analysts say she is likely to argue that with the unemployment rate at 5 percent, job growth strong and wages starting to rise, it no longer makes sense to have rates below zero, an emergency policy born of the financial crisis.
“She has two opportunities now to set expectations for a rate hike in December,” said Megan Greene, chief economist at Manulife. “And Fed members have been tripping all over themselves to say they would like to normalize policy. They have been laying down sign posts everywhere.” Greene added that the Fed very much wants to get out of the way before the election. “They don’t like to talk about it, but I think they will be moving more for political reasons than economic ones.”

Yellen and her Fed colleagues will get one more big data point on Friday with the release of the November jobs report. It is expected to show another solid gain of 200,000 jobs and no change to the 5 percent unemployment rate. Anything close to that range would signal that the Fed will raise its target by a quarter of a percent this month, the first move in that direction since June of 2006.
Yellen is likely to stress that the Fed would pause its rate hiking campaign quickly if it appears to be damaging the economy and that it will stop well short of previous levels. The most likely scenario is that investors take this well-telegraphed policy shift in stride and view it more as a vote of confidence in the U.S. economy than as an obstacle that could hurt stock prices and tamp down growth.
But even if the Fed manages a successful exit, Democrats are far from assured of a smoothly functioning economy next year. The labor force participation rate remains at a 30-year low, and significant middle class wage gains remain much more of a hope than a reality.
Aides and outside advisers to Clinton are well aware of these problems and have focused on them in Clinton’s proposals to boost some taxes on the wealthy, crack down on high-speed Wall Street trading and spend more on infrastructure. Clinton, who announced a $275 billion infrastructure spending plan on Monday, plans to focus on jobs and the economy throughout December.
The effort reflects her advisers’ wariness of polls continuing to show deep dissatisfaction with the direction of the economy despite modest growth and low unemployment. “It is not the position that everything is hunky-dory,” Gene Sperling, a top outside Clinton adviser, said at a recent POLITICO event on the economy in Iowa. “I think the American people are capable of understanding that things got dramatically better under Barack Obama, that you are far better off today than you were when he came into office, and that yet things are not perfect and there’s more to do.”
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Regardless of the impact of the Fed’s rate hike move, Republicans also face challenges in presenting an economic argument next year that addresses current voter frustration. Much of Trump’s rise has been based on angry blue-collar voters who have seen their wages eroded by decades of globalization. These voters are skeptical of free trade and mostly not inclined to favor tax cuts that skew to higher income earners, a trademark of most of the GOP economic proposals.
GOP analysts say for the party’s nominee to win they will have to convince voters that they, and not Clinton, have a better path to faster growth and better living standards.
“I think you focus entirely on the growth in the standard of living, median household incomes,” American Action Forum’s Douglas Holtz-Eakin said at the POLITICO event in Iowa. “The unemployment rate might be down, but if you do polling and ask people, they think we’re still in a recession. What people want to see is their standard of living get better, and that has to be the focus.”