By: Ethan Penner, Founder Mosaic Real Estate Credit, LLC
I read with great amusement that Janet Yellen feels that she must move to raise rates soon as she feared that failing to do so could undermine the credibility of the Fed (and of herself as well, I presume). This amusement I felt is more the tragic-comic amusement rather than the joyful type.
First, the global economy remains weak. China has just recently released statistics, which are very concerning about the health of their economy – which most point to as having been the engine of growth in the world for the past decade or more. And, importantly, China is not known for honest admissions of its failings, so one might assume that things there may be even worse than these numbers imply. The current “recovery” which one might characterize even graciously as having been a weak one, is long in the tooth and expected by most to be nearing its end. Is this the time to raise rates, which traditionally has the effect of stifling economic vibrancy, one might rightly wonder?
Second, I wonder what credibility Ms. Yellen thinks that she or the Fed still have. They have been wrong nearly 100% of the time when forecasting economic growth, and they’ve incorrectly telegraphed rate increases for years now.
It seems to me that Ms. Yellen ought to stop talking and stop wondering about Fed credibility. She ought to stand down and let markets find ways to fund credit needs and let rates, which is the cost of credit, be determined naturally by the forces of supply and demand. When rates rise, and asset prices fall, and the government deficit rises to both fund an increasing social safety net and higher cost of debt service she ought to do nothing except tell the government that it is not within her authority to bail them out of their fiscal stupidity. This non-action would shift the focus to fiscal policy and impose the discipline that is needed and warranted upon government to right itself, and reveal to the public the gross incompetence of our current government – thus allowing more people to make informed decisions at the ballots. Fed intervention has occurred out of a fear of the harsh disciplining nature of market forces, but the fantasy distortions that this has brought about has only allowed for the perpetuation of bad policies and bad decisions on every level.