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9 May 2015
Is the Fed hurting the US economy? - BAML
FXStreet (Guatemala) - Analysts at Bank of America Merrill Lynch explained that, over the years, critics (and "trigger happy" forecasters) of Fed policy have offered an evolving list of arguments for the Fed to hike rates.
Key Quotes:
"QE is inevitably inflationary. Easy policy is creating a credit/equity/bond/other bubble.Wage indicators like earnings for production and nonsupervisory workers are signaling serious inflation. Pockets of labor market tightness are signaling trouble ahead. The drop in the short-term unemployment rate signals that slack is gone. Fed policy is hurting people on fixed incomes."
"And now the latest: by keeping rates near zero, the Fed is hurting the economy. Thus a recent Wall Street Journal op ed argued that "maybe after six years of zero-interest rates, and long after the financial crisis ended, the Fed should wonder if its policies haven't become an impediment to faster growth. Maybe letting markets begin to set interest rates again would lead to a better allocation of capital and less economic uncertainty." In other words, if they would just hike, the economy would take off."
"We are no more enamored of this latest critique/forecast than the previous ones. Let's look at why growth has disappointed, how Fed policy accelerated the "rehab recovery" and why a declaring victory and hiking rates would hurt rather than help growth. In our view, the current Fed policy makes sense: look for clear signs that the recent economic soft patch is temporary and then start a slow normalization process."
Key Quotes:
"QE is inevitably inflationary. Easy policy is creating a credit/equity/bond/other bubble.Wage indicators like earnings for production and nonsupervisory workers are signaling serious inflation. Pockets of labor market tightness are signaling trouble ahead. The drop in the short-term unemployment rate signals that slack is gone. Fed policy is hurting people on fixed incomes."
"And now the latest: by keeping rates near zero, the Fed is hurting the economy. Thus a recent Wall Street Journal op ed argued that "maybe after six years of zero-interest rates, and long after the financial crisis ended, the Fed should wonder if its policies haven't become an impediment to faster growth. Maybe letting markets begin to set interest rates again would lead to a better allocation of capital and less economic uncertainty." In other words, if they would just hike, the economy would take off."
"We are no more enamored of this latest critique/forecast than the previous ones. Let's look at why growth has disappointed, how Fed policy accelerated the "rehab recovery" and why a declaring victory and hiking rates would hurt rather than help growth. In our view, the current Fed policy makes sense: look for clear signs that the recent economic soft patch is temporary and then start a slow normalization process."