Fed Near the Cliff

The incessant parsing and analysis of each and every Fed utterance is becoming quite comical. God love Steve Liesman and Mark Zandi, but are they really adding much value by trying to read between the lines of each statement from each Fed member? Do they believe the Fed is hiding something? Or could Janet Yellen (and Bernanke before her) simply be telling the truth when she says the path of future monetary will be "data-dependent"? I, for one, don't think Yellen has any idea when the first rate hike will be. I think she would like to get the process started sooner rather than later. I further believe that she was favoring June before the most recent round of economic data revealed some lingering weaknesses (especially with regard to the labor market). But therein lies the problem. It seems unlikely, from my vantage point, that there will ever come a day when all the Fed's concerns have been laid to rest. If so, the Fed will have found itself way behind the curve.

My worry is that the Fed has strayed beyond its dual mandates of maximizing employment and maintaining price stability. By assuming responsibility for the economy at large rather than its narrowly defined goals, the Fed has expanded its mandate. The Fed now seems to have supervisory duties over the housing market, the stock market, income inequality, the value of the dollar, commodity prices, stability in emerging markets, etc., etc. Did it make sense that the Fed played a larger role in the economy during the critically important months following the financial crisis? Of course. The Fed was the undisputed hero as we stared into the abyss. But we are now nearly six years into the economic "recovery." Does it make sense that the Fed retains responsibility for fine-tuning the economy still today? I don't think so. Those of us arguing that a Fed rate hike is long overdue are simply saying that the emergency generator is no longer needed.

There was an article posted on CNBC.com the other day ("Why Fed Trade Reminds Me of 2007, 2008: El-Erian", by Matthew J. Belvedere) which sums up my sentiments quite neatly through a short interview with PIMCO's Mohamed El-Erian. Consistent with the consensus opinion, El-Erian said that it is most likely that the Fed will move at an ever-so-cautious pace compared to historical periods of monetary tightening. El-Erian goes on to say, "But what they should do is something different." The Fed should "recognize the main risk to this economy comes from mounting financial imbalances that could threaten instability down the road." Bravo Mohamed!

There must be some reason that economists are spending so much time and energy trying to figure out what the Fed will do next. In my view, these folks must clearly believe that the inception of Fed tightening will also bring significant volatility in the capital markets. If this is indeed true, though, the Fed is only compounding the problem by continually kicking the can down the road. Shouldn't they just get it over with?

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