Federal Reserve policymakers meet Tuesday and Wednesday to discuss when to raise interest rates and how they will communicate those intentions without upsetting financial markets or the economic recovery. Unfortunately, the Fed is constrained by its own past missteps, and its credibility is at stake.
Short term rates have been near zero since 2008, and along with Quantitative Easing—the Fed’s purchases and continued holdings of long-term bonds—those have held down the whole structure of rates on bonds, mortgages and consumer loans to arbitrarily low levels, and imposed significant distortions on the economy.
Low rates discourage bankers from lending to businesses that create jobs, because they fear being stuck with low yielding assets when the rates they must pay to keep deposits could go up a lot in the future.
Instead cheap money encourages Wall Street speculators and bankers to gamble in foreign exchange and commodities markets, and similar activities of dubious economic value, to continue paying multi-million dollar bonuses. For example to Democratic operatives like Lazard Ltd global banking head and Obama nominee for Under Secretary of Treasury, Antonio Weiss.
In addition, low rates have inflated prices for agricultural land, stocks and junk bonds issued by companies with dodgy prospects, and homes in tonier neighborhoods such as Manhattan and San Francisco.
Seen in these terms, higher interest rates might actually be more beneficial to instigating growth by eliminating perverse incentives and the terrible misuse of capital for speculative, unproductive purposes.
Apparently they don’t teach at Pembroke College, where Fed Chairwoman Yellen attended, what the rest of us learned in Economics 101. Namely, easy money can do little to boost economic growth when the economy has a great deal of slack.
With one of six men between the ages of 25 and 54 without a job, the U.S. economy has more slack than a six foot clothes line hanging on poles two feet apart.
