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There is another reason for normalizing rates and reducing the balance sheet.
Lowering rates is what the FED typically does during a recession. If that recession threatens to become a depression, then a program to increase the balance sheet is pursued. As long a rates are already low, the FED cannot lower them. And as long as the balance sheet is still rather large, the FED cannot increase it.
Now the economy is doing well the FED must decrease the balance sheet and increase the rate so that it will have some ammunition when the next recession hits. We don't know when that will be, but we know for a fact that there will be a future recession, and the FED needs to be ready to deal with it!
Lez-B-Honest here. Does the editorial board actually think Yelling is going to listen to them?
The 1% phenomenon of the middleclass not sharing in the added wealth of the country for the last 40 years is probably playing a major role in the prolonged low inflation reading. The US middleclass worker has been schooled like Pavlov's dog not to reach too high lest they be shown the door via outsourcing of their job to China, India, etc., imported Mexicans, HB1 visa job replacements, union busting, minimum wage now equals impoverishment wage, zero infrastructure investments, no apprentice programs. high cost of higher education and the Betsy Devos view of minimal public education effort for the middleclassIt may take a revolution to get the middleclass a place back at the table. such that they are able to successfully demand wage increases that would increase inflation pressures.
The entire Great Recession was about squeezing out the system distortions which caused Americans to be overpaid compared to their counterparts in other countries. We are now at the New Normal.
You can lead a revolution, but no one with your ideology is capable of running a functioning country. After all, that is how the elite became elite. Running a functioning country requires a lot more than your bloated sense of entitlement.
The Fed has been 'planning' for 2 1/2 years, they went raise pro-active in Dec '14. Three measly 25bp bumps.
The US is not THE reserve currency anymore. Oil is traded in Yuan. Iron trades on conversion between yuan and Aussie. The German 10yr is at .57% because of German discipline and confidence in Euro.
The Market is in charge of rates, not Janet & Co. Kashkari knows this, that's why he wants to unwind the balance sheet. Only the sale of assets will move rates: adds supply, removes dollars and creates 'expectations' of more sales / lower prices / higher yields.
One of the Fed's biggest mistakes since the Financial Crisis is of their own doing, or as author puts it "The Fed's biggest challenge is to communicate this message without unsettling financial markets."
Actually, the financial markets are too settled and the Fed is the main reason since they constantly telegraph that they will never really raise rates and financial engineering should proceed no matter what the long term consequences. But of course, after following this strategy for NINE years, it is a bit tough to walk away from it.
Yellen has no intention of raising rates above inflation (there will always be some data point to obsess about), - inflation was above 2% for years and the Fed left overnight lending rates at 0%?
Hopefully, the Trump administration (I know a Real Estate developer is not likely to want rates higher) will appoint sounder minds to this organization. His first appointee seems to be in the right direction - Randal Quarles says he believes in having some basic rules guidance for interest rate policy (but many supposed hawks change once they get there).
Before anyone complains that the Fed needs flexibility, it should be remembered it was this group in 2003 who took rates to 1% and waited WAY too long to tighten then, which was a major factor in the previous crisis. They apparently learned nothing from that experience except that Central Banks should just buy tremendous amounts of financial assets themselves to help "stabliize "things. In aggregate, all the CBs now own securities equal to 50% of global GDP and counting - Thanks ECB and Japan too for being such followers of Bernanke. I doubt that was/is the right solution, but it guarantees it will take forever to resolve.
Best of luck to whoever follows in Yellen's footsteps.
Here is an interesting look at what Janet Yellen had to say about Washington's growing debt burden in her recent testimony:
This is the one overriding factor that should be concerning investors.