The Fed would be crazy to raise rates now

Given the Paris attacks, Japan's re-emergent recession, the continued crash in commodities and the softness in economic data here at home, the Federal Reserve would be ill-advised to begin normalizing interest rates in December.

Fed Chair Janet Yellen
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Fed Chair Janet Yellen

If the Fed is truly data-dependent, and data come in all forms, it should see that geopolitical events create, as they did after the Sept. 11 attacks, a "cocooning effect," slowing the pace of daily life and, potentially, interrupting economic activity, both abroad and here at home.

It is an effect we can ill-afford since, even domestically, consumers appear to be slowing their purchases of goods before the all-important holiday season, a trend which could be exacerbated by folks avoiding highly populated places, like shopping malls and restaurants, post-Paris.

The risk of a broadening war in the Middle East is high, given French President Hollande's declaration that France is "at war" with ISIS. If, indeed, this is a full declaration of war by a NATO member, Article Five of the NATO Constitution require member of the Alliance to simultaneously declare war against the aggrieved party's enemy. This is not an inconsequential event, despite the fact that several nations are already combatting ISIS through coordinated air assaults.

Evidence had already been mounting that global growth is slowing further, deflationary pressures are accelerating and global markets are reacting negatively to the strong hints from Fed officials that a rate hike in December appears to be a near-certainty.

Crude oil is experiencing a record supply and slack demand, while copper prices are at six-year lows. That's sending a clear message that industrial demand around the world is weakening noticeably.

Japan has entered a technical recession (two successive quarters of declining economic growth) for the second time in two years, while China is struggling to stimulate, and reform, its export dependent economy. Those objectives appear to be at odds with each other and have produced a manufacturing recession in China and industrial weakness among its major trading partners, including the U.S.

I am keenly aware of the Fed's desire to get off the zero line to ensure that it has some ammunition to fight the next financial crisis, or the next recession. However, that type of reasoning is similar to a doctor infecting someone with the flu with the intent of fending off pneumonia. One is clearly worse than the other, but the first can easily lead to the second.

And, while a "small" rate hike should be easily absorbed by the U.S. market and economy, there are pockets of risk that could be shocked by even the slightest change in policy. Further, the markets, unless given strict assurances by the Fed to the contrary, would likely begin to price in a series of rate hikes, which could lead to unintended market and economic consequences.

Commercial real estate is becoming toppy, and consequently, vulnerable to a hike in rates. Capitalization rates in both commercial and multi-family real estate are at record lows, implying record high prices in those sectors. The Fed should use macro-prudential policies to slow the speculative excesses on those markets, not the blunt tool of monetary policy.

Most important, inflation continues to decline, both at home and abroad. The Fed's most-closely watched measure of inflation, the chain-weighted, core PCE deflator, is running at about a 1-percent annual rate — half of the Fed's stated target.

Producer prices fell 0.4 percent in October, while the renewed drop in oil will likely push consumer prices down. (We'll get that report later in the week.)

While no one, myself included, would like to see rates at zero forever, given what that implies about the state of the global economy, the Fed must deal with the world as it is, not as it wishes it to be.

At this tender moment, the world is neither safe, nor economically secure. This not the moment to test the resilience of the economy, this is a moment to protect the gains that have thus far been made.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.