Is the Fed behind the proverbial interest rate eight ball?

By | April 19, 2015

Whatever industry you happen to be working in, a healthy and consistently growing US economy will likely be one of your most important keys to success!

Certainly my business of providing the title insurance for buyers and refinancers of real estate depends heavily on a growing economy, consumer confidence, a vibrant transactional marketplace and available financing from willing banking partners.

But if we move past mere statistics such as quarterly GDP or the headline unemployment number, much more comes into play that actually delineates between surface economic strength and the feeling among the masses that things are truly getting better.

A feeling that will then lead to a comfort level allowing for significant financial moves to be made.

The so-called comfort zone will typically include a sense of job security but, in addition to simply being employed, that income derived from those jobs is increasing at a consistent pace.

In addition, this sense of financial wellbeing also will require some type of anecdotal evidence that financial institutions are ready and actually willing to lend not only for mortgages but to businesses as well.

This lending is the fuel that adds the critical liquidity that provides the resources for growth and job creation that help lead to an expanding economy.

In effect a virtuous cycle!

Quantitative Easing, Global Interest Rates And Stagnant, Contracting Or Very Slow-Growth Economies!

Central banks around the world have been engaging in the exercise of bringing short-term interest rates down to extremely low levels and keeping them there, levels that in some countries even include government bonds sporting negative yields.

The general idea has been to spur both demand for loans from individuals and businesses as well as bank lending. Whether it has actually accomplished that goal is open to debate.

One thing that’s certain, however, is that Federal Reserve actions have forced investors to move further out onto the the risk spectrum in a grab for returns while savers (i.e. retirees) who depend on the income derived from fixed income investments have been decimated!

In theory the only scenario that would spur central bankers to actually raise rates would be a measurable expansion of economic growth that was ideally also coupled with a pick-up in inflation to some pre-determined level.

But in the absence of those two variables actually occurring to the Fed’s satisfaction, what is the Central Banks game-plan moving forward.

And finally, in reality should rates have already been ratcheted upward?

The Wall Street Journal article ‘The Fed’s Faulty 1937 Excuse‘ written by Christian Broda And Stanley Druckenmiller offers an analysis…

‘Near-zero rates during and in the years after 2008 no doubt helped end the so-called Great Recession. But the U.S. economy is no longer under emergency conditions or facing the perils of 1937. Why then does it require emergency monetary policy? While inflation targeting gave no warning of what was to come in 2008, why is inflation moving from 1.5% to 2% a necessary condition for raising rates from the current emergency levels? Even models that the Fed used to justify quantitative easing (QE) in recent years are today pointing to rates well above 1%. Why now use new, untested theories to justify zero?

Policy makers purport to be looking for signs of financial excesses. At present, private companies are being valued at $10 billion with no revenues. Corporations are borrowing $600 billion a year to buy back stocks at record prices. Leveraged loans, “covenant-lite” loans with loose loan requirements, and the high-yield bond market are well above their 2007 record size.

Even if policy makers judge that these levels are not excessive, since when do we need to see the seeds of the next crisis for an extremely accommodative policy stance to be reduced? Because excesses are seen best only ex post, policy should be cautious ex ante.

The two real culprits of the Fed’s constant moving of the goal posts are the prevailing “Bernanke doctrine” and the growing sense of unlimited power of monetary policy. In a famous speech to the American Economic Association in January 2010, then Federal Reserve Chairman Ben Bernanke postulated that the Fed had no significant impact on the housing bubble or on the increase in financial leverage and that monetary policy was too blunt a tool to be used to smooth asset cycles. After emphasizing for years that low rates have the ability to boost asset prices, under what criteria can the Fed insist that it had no influence on the boom preceding the financial crisis?

In the last six years and despite growing financial regulation, global debt (public and private) has increased by $57 trillion, three times faster than the growth of world GDP. Low real interest rates are likely responsible, at least in part, for this growth. So even if the causality between rates and asset prices is hard to discern academically, it seems unwise to assume that the current policy stance has no expected, future costs. Even if we are not on the verge of another crisis, the public debate should take account of the potential consequences of current policies.

After the severe stress generated by the Great Recession, was the cost not sufficient to warrant the pre-emptive use of a blunt tool like monetary policy? Given the relationship between interest rates and asset prices, the deflationary scare post-2008 could well have been mitigated by less expansionary policies in the early 2000s.

QE has ushered in a new sense of power by central banks. Yet monetary policy has limitations. It is mostly well-suited to filling in temporary shortfalls in demand. Except for exceptional conditions, it borrows growth from the future.

The Fed seems all-too-convinced that this is a trade-off worth making. With unemployment at 10%, history was likely on their side. At a 5.5% unemployment rate, it fails the test of history and common sense. May the risk-reward of too early versus too late prevailing in policy circles be backward?’


Michael Haltman, President of Hallmark Abstract Service, New York.

HAS is a provider of title insurance in New York State for residential and commercial real estate transactions.

And, for anyone either buying a property or refinancing, remember that although your attorney will likely recommend a title insurance provider you always have the right to choose your own (click here to learn more)!

If you have any questions you can reach Michael by email at

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