Grand-dad, what’s a rate hike?: James Saft
Oct 17 (Reuters) – Like corded telephones, it is looking
like our grandchildren will someday need to have the concept of
rate hikes explained to them.
Seriously, someone needs to put a Federal Reserve statement
with an interest rate hike into a time capsule so future
civilizations can know that once upon a time monetary policy
could become something known as ‘tighter’.
And as for the taper, which only recently we were expecting,
that too may take quite a while.
In fact, now that we have what passes for a budget deal in
Washington, we, and the Fed, can get on with the important
business of counting the four top reasons not to taper.
REASONS NOT TO (EXPECT A) TAPER
1. There was never economic justification.
There probably wasn’t sufficient justification to tighten
conditions back in August, before this mess transpired.
Inflation was too low and job growth and labor force
participation too anemic. Tightening now would require some new,
positive reason, or an over-riding commitment to risk management
and bubble prevention.
2. There is no new, positive reason, quite the reverse.
The government shutdown did real damage to the economy, both
directly, and more importantly indirectly. Consumer confidence
suffered, which is reflected in the buzz coming out of the
A study carried out by Macroeconomic Advisors attempted to
put the cost of three years of crisis-driven budget negotiations
and fiscal policy and came up with a sobering conclusion: it has
shaved about 1 percentage point off of output a year. Borrowing
costs are higher than they otherwise would be, and discretionary
spending lower. (here)
3. You think this is over? This isn’t over.
Despite what anyone may say, we are going to be going down
the budget impasse road yet again sometime soon. That not only
increases the risk of default, it raises and extends the pause
in consumption and investment the budget morass has already
caused. All of this makes it possible that Fitch Ratings, which
put the U.S. on ratings watch for a possible downgrade of its
AAA-rating, will actually pull the trigger.
4. Even the hawks don’t like chicken any more.
When arch-hawk Richard Fisher of the Dallas Fed comes out
saying the taper has “all been swamped by fiscal shenanigans,”
as he did on Thursday, you know we are on hold for some time.
True, Esther George of the Kansas City Fed came out again in
favor of tapering, but wider support in the near term should be
hard to find.
WHO IS MINDING THE STORE?
None of this makes a taper in December entirely impossible.
There is a press conference then, and now that we have the
government collecting data once again it is possible we’ll see
some figures that could be used in justification.
But that data is instead more likely to reflect
deteriorating conditions, as the impact of the budget mess makes
To be sure, there would be a certain poetry in Ben Bernanke
beginning the taper, and he does have December and January
meetings at which this could be done, with a press conference
slated for December.
In the absence of really strong data, however, the
temptation has to be to wait at least until March, which has a
press conference and will be Janet Yellen’s first bite at the
Tapering is supposed to be as much about communication as
action, so there could be a justification in allowing the person
who will bear the load to do the explaining.
Of course, by March we will have more opportunities to shoot
ourselves in the foot by defaulting, or by otherwise creating
pointless uncertainty over our ability to govern ourselves.
You could, of course, construct a good argument that the Fed
should be tapering anyway. That it is not its job to insure the
U.S. economy against malpractice by its duly elected
representatives. And that, moreover, the longer we continue with
QE the more the negative side-effects pile up. Specifically, QE
fosters poor allocation of capital and the formation of bubbles,
and does it while disproportionately benefiting the wealthy and
Those are reasonable arguments, and just might be true, but
they are unlikely to prevail.
More likely the economy will continue to struggle,
Washington will continue to throw sand in the wheels and the Fed
will do what the Fed does, which is to support asset prices and
A return to “normal” may take a very, very long time.
(At the time of publication, Reuters columnist James Saft did
not own any direct investments in securities mentioned in this
article. He may be an owner indirectly as an investor in a fund.
For previous columns by James Saft, click on )
(Editing by James Dalgleish)