“The Fed’s loose policies have pushed up stock, bond and real estate prices – which is, in fact, the point of a low-rate policy. There is legitimate debate about how overvalued assets may be. But low rates, by fostering investments with borrowed money, invariably create the conditions for bubbles.”, New York Times Editorial Board, August 24, 2014
“Both the liberal New York Times and conservative Wall Street Journal Editorial Boards agree about the Fed’s primary role in driving all types of asset prices to unsustainable levels!!! (Beyond the quote above, I am not agreeing with the rest of this OpEd.) I and many others believe the Fed’s low rate policies pre-crisis were a major cause of the unsustainable U.S. housing bubble and financial crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank
SundayReview | Editorial
Why Interest Rates Need to Stay Low
By THE EDITORIAL BOARD
A sharp debate within the Federal Reserve over when to raise interest rates was publicly aired last week at the annual central bankers’ conference in Jackson Hole, Wyo. On one side is a small yet vocal minority of Fed officials who want to head off inflation by raising rates sooner rather than later. On the other is a majority that thinks a near-term rate hike would stifle growth and, with it, any chance of restoring health to the labor market. That group includes Janet Yellen, the Fed’s chairwoman, and most members of the Fed’s policy committee.
The economic evidence indisputably favors Ms. Yellen, who has indicated that rate increases should not begin until sometime next year, at the earliest. It will take until then to be able to say with confidence whether recent improvements in growth and hiring are sustainable. For now, the prospects for both are mixed at best, with the preponderance of evidence — including the Fed’s own analysis — indicating that growth this year will average out around a still-sluggish 2.3 percent. That is too slow to reliably boost the number and quality of jobs and, as such, too slow to justify raising rates.
It is also unknown whether growth and hiring, if and when they fully recover, will spark inflation. For that to occur, wage increases would have to be substantial enough to push up prices, meaning annual raises in excess of 3.5 percent given present rates of inflation and productivity growth. Wage increases of that magnitude are not in the cards, and neither is any hint of worrisome inflation. Since the economic recovery began in mid-2009, hourly wages have risen by a mere 1.9 percent a year on average.
Against that backdrop, arguing in favor of a near-term rate increase is to argue for subpar wage growth and for continuing a status quo in which economic gains flow largely into profits rather than wages. Ms. Yellen and her supporters are right to rebut that stance in both word and deed.
The debate over interest rates does not stop there. Another argument in favor of near-term rate increases is that the Fed’s prolonged low-rate policy is inflating asset bubbles that could burst with harmful consequences. Unlike the inflation argument, for which there is no evidence, concern about bubbles is justified.
The Fed’s loose policies have pushed up stock, bond and real estate prices — which is, in fact, the point of a low-rate policy. There is legitimate debate about how overvalued assets may be. But low rates, by fostering investments with borrowed money, invariably create the conditions for bubbles.
The answer, however, is not to raise rates, slowing the entire economy in order to tame the markets. The answer, laid out in recent remarks by Ms. Yellen and Stanley Fischer, the Fed vice chairman, is to use bank regulation and financial oversight to ensure that institutions and investors do not use low rates as a springboard for speculating.
That requires identifying and stopping reckless lending of the sort that has surfaced in subprime auto loans and unaffordable student loans. And it requires vigilance for signs of systemic risk in the complex activities that make institutions interdependent. Here the Fed is still too lax, as in its recent indulgence of too-big-too-fail banks that have failed to meet regulatory demands intended to reduce risks and prevent bailouts.
There is no guarantee that keeping rates low for a “considerable period,” as the Fed leadership has pledged, will propel the economy forward. But it is all but certain the economy will backslide if rates are raised too soon. That’s because the economy’s critical underpinning — good jobs at good pay — has not yet been restored, and until it is, monetary support from the Fed and fiscal support from Congress are needed. Fiscal support has been withdrawn and reversed in recent years, a misguided move that has needlessly depressed growth and represents a failure of both policy and politics. Raising rates too soon would be a policy error on a par with that debacle, a mistake that the economy can ill afford.