The Little Engine That Couldn’t

yellen-and-rate-hike-cartoon

The Federal Reserve once again did a head fake. Interest rates will remain at historic lows for yet another cycle. You can hear echoes of the children’s fairy tale from our little economic engine, “I think I can. I think I can. Hmm…maybe not this time.” This is getting old and the markets are coming to realize this. Keep this up and no one will listen to the Fed, even though it is speaking publicly at historic volumes.

Fed Chair Janet Yellen says that they really, really want to normalize rates, and the economic indicators support this if they ignore short-term effects as they should. But they always find some monster on the horizon that deters them. So far anyway, these monsters never bite, although statistically we know that one eventually will. The latest is Brexit plus a disappointing jobs report. Will there ever be a clear field ahead? Probably not. The nature of our world economic system is that threats are endemic. Sooner or later, the Fed must accept the risk and move firmly forward on rates, but if they wait until the coast is entirely clear, timidly dithering on the edge, disaster is likely.

Consider this. Remaining in an unsustainably low-interest environment removes the main lever that the Fed has to respond to a real problem when it inevitably strikes. Of course they can always print money, but that is a fool’s errand.

Advertisements