Save the Speculators: Does the Fed have the guts to boost interest rates vs Wall St.?

(Wednesday update with links to Summers, Blankfein comments, new sources) We've been waiting since before the 2008 credit crisis  -- borrowers in fear, savers and lenders in hope -- for the day the Federal Reserve finally raises interest rate targets above the near-historic lows. Goldman Sachs boss Lloyd Blankfein,  ex-Treasury Sec. Larry Summers and others on Wall St. worry even a symbolic 0.25 percent increase in the federal fund rate will scare investors.

"The growth scare is likely enough to delay the Fed's rate hike" until at least December, predicts Jason Pride, Director of Investment Strategy at Glenmede Trust, which manages $29 billion in investments. The "consensus" is that the Fed won't raise rates this week, says Tom Wilson, managing director and investment committee senior at $18.5 billion asset Brinker Capital in Berwyn. The larger mystery is how much the Fed emphasizes recent improved hiring, low inflation and China's slow economy in projecting a future rate hike.

But "rates have to go up," says Ernie Cecilia, chief investment officer at Bryn Mawr Trust Co. Cheap money forces too many investors into bad deals like mispriced junk bonds and overpriced stocks and real estate speculation. Low rates starve careful savers, including retirees, he told me.

If the Fed doesn't boost rates at its Wednesday-Thursday monthly meeting, in the face of a strengthening economy, it risks looking unduly scared about stock market speculators and unwilling to focus on its mission to ensure healthy banks and bond investors, Cecilia adds, echoing what bank economists at Wells Fargo and PNC told me earlier this year. "The Fed needs to show leadership. When they raise rates there will be stock volatility. But it's the right thing to do, the prudent thing to do."

Why would bankers want money to be more expensive? Not just so they can charge more: With the Fed's balance sheet still swollen by trillions of dollars in bank reserves and old mortgage debt it bought to stabilize banks, the effective Fed funds rate -- the price banks pay for money at its simplest --  sits down around 0.14 percent, a fraction of the 40-year average 5.95 percent, Cecilia noted. That means the Fed has little leverage to do its job as a financial-market disciplinarian and lender of last resort in the next financial shock. "The Fed needs to put that tool back in its toolbox," Cecilia told me.

He sees distant but persistent signs of inflation: hiring shortages, rising wages, dangerously low junk-bond interest rates, confusion over the future price of money. It's not bad now, but if the Fed starts raising now it will be less shocking when it has to push interest to higher leves in the next couple of years."The Fed needs to reduce the ambiguity," Cecilia concluded.

Are Fed chair Janet Yellen and her crew ready for that? Last summer, investors and bankers expected the Fed would boost rates a symbolic quarter of a percent at its two-day quarterly meeting this Wednesday and Thursday. But stock markets' August tumble shook that confidence.

As of Monday, Fed funds futures trading on the Chicago futures market showed only a 28 percent confidence the Fed would boost rates even a modest 25 basis points (0.25%) this month. That's down from more than 50 percent in early August, notes Tony Fusco, portfolio manager for Schooner mutual funds in Radnor. Despite last-minute public lobbying by Wall Street titans like Blankfein, "if you look at just the U.S. economic data, there's no reason for the Fed not to begin the rate hike process," says Hank Smith, who oversees $8 billion as chief investment officer at Haverford Trust Co.

This week the Fed's deliberations will be informed for the first time by a report on Philadelphia regional economic conditions by new Philadelphia Federal Reserve Bank president Patrick Harker, previously President of the University of Delaware and dean of the Wharton School.

While Harker's Philly Fed predecessor, libertarian ideologue economist Charles I. Plosser, "was a hawk" who pushed for interest-rate hikes and warned the Fed can't solve long-term unemployment (and who quit as soon as his rotating seat on the Fed Board of Governors expired; Harker gets to vote in 2017),

Harker, a former chief executive who had to meet payroll at large, politically-charged institutions, brings "a very practical outlook and expensive experience in tough situations" to the ivory-tower Fed ranks, said Ted Peters, a former bank president and Harker colleague on the Philly Fed board who now heads the Bluestone Financial Institutions Fund, which buys bank stocks.

Peters said he and Harker were both influenced by Plosser's insistence that artificially low interest rates can warp the economy, encourage extra borrowing and speculation that "misallocates resources." The group met by phone every two weeks, and in-person once a month, so Harker "is very, very up to speed on what is going on," Peters added. Still, despite Plosser's influence, hiring is up, energy and food prices are flat or down, and "I think Pat's going to support a rate increase now, in September," Peters concluded.

Two and a half months into his term, Harker hasn't yet made public speeches. Spokesman Jim Ely says that's not unusual for a new Fed regional bank president. What is unusual, compared to some government agencies, is the Philadelphia Fed's practice of not making public a list or schedule of the business and financial leaders Harker is meeting with privately. "Unlike other (Federal Reserve) Districts, we do not release the log," Ely told me.

"We are talking about advisory council meetings and things that are quite usual," he added. Harker is scheduled to address a public Fed conference in Philadelphia and take some reporter questions in December.