The Fed Blew It
The Fed had multiple opportunities to let the air out of unsustainable asset bubbles by notching interest rates higher and tapering its asset purchases (QE).
The Federal Reserve blew it by not normalizing interest rates a long time ago. The consensus in financial circles is the exact opposite: the Fed has blown it in the past by nudging rates up too early.
Let’s examine the idea that the Fed can’t possibly go wrong keeping interest rates at near-zero for as long as it takes to create inflation (the Keynesian Cargo Cult’s talisman) and push unemployment below 6% (mission accomplished).
One problem with this “keep interest rates low forever” strategy is that it leaves the Fed no room to lower rates in the next recession. By keeping interest rates at near-zero for six long years of “recovery,” the Fed is now facing a global recession with no real policy option to lower rates.
The Fed blew it by waiting six long years to even discuss raising rates.
Let’s consider the impact on the real economy of a 1% rise in the Fed funds rate. The move from 0% to 1% is not very large in terms of its impact on monthly payments for borrowers. Borrowers with poor credit are paying in excess of 15% right now on credit cards and subprime auto loans, and many student loans are in the 7%-8% range. A 1% increase isn’t going to impact these borrowers much.
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