Is The Fed In Crisis?

The Fed’s rate of interest is expected to rise to zero by the end of 2017, but the economic and monetary policy makers are still working on what to do about it.

But that hasn’t stopped a number of pundits from calling for a return to zero interest rates.

Here’s a look at some of the theories and predictions that have come out of the financial markets.

A ‘Predictable’ End: Paul Krugman, author of The Courage to Act, says that by year’s end, a zero rate would mean the Fed would be running an economy that is ‘unpredictable.’

That would mean we would be spending a greater proportion of our economy’s budget on interest payments, he writes in The New York Times.

‘We’d end up with an economy in which interest payments had to be paid on time and in full every month,’ he writes.

‘But because of the nature of the payments, that could cause a financial crisis that would make us all worse off.’

He also says that a zero interest rate would be the ‘worst’ outcome for the economy.

Krugman’s view is shared by Fed Chair Janet Yellen, who has said that her view is that a ‘return to normalcy’ is the only ‘rational’ course of action.

‘There are no easy answers here, and there are no magic solutions,’ she said in an interview last year.

‘The right thing to do would be to return to a zero inflation rate, which is what we would need to achieve a healthy recovery, but we have no choice.

It is simply too dangerous to continue this trajectory of inflation and unemployment that has already been the norm for a very long time.

‘What we are now seeing is a real-world crisis.’

Economist Adam Smith, author, The Wealth of Nations, agrees.

‘A zero interest-rate policy would be catastrophic, in terms of both inflation and employment.

‘As a matter of fact, we now see that this is the best outcome we could hope for in the event of a full-blown crisis,’ Smith said.

‘It is what happened in the 18th century and what we need today.

‘And yet, this is still the case, with inflation and joblessness rising in the face of the Fed’s ultra-low interest rate policy.

The Fed is still trying to solve the problems of inflation, and so the current system is unsustainable.

‘So what do we do?

There are two answers.

The first is to have a large-scale, long-term monetary policy, which would cause a large and permanent increase in interest rates that would be consistent with the current economy’s path and would lead to an end to the current inflationary spiral.

‘Another option is to try and return to full employment, which, in theory, would be much easier and less dangerous than running a zero-interest rate policy,’ Smith continued.

‘In fact, there is evidence to suggest that it is possible to return a much more stable economy to full-employment and even full-wage employment, even with a full Fed rate.’

But Krugman and Smith are not alone in their criticism of a zero level of interest rates, and economists have been warning for years that interest rates are now at their highest level in history.

And some have been more willing to make the leap than others.

‘Zero interest rates have been a major risk factor in the last few decades,’ said Andrew Smeeding, an economist with the Council of Economic Advisers.

‘If they can be avoided, the Fed should be in no hurry to increase its rates again.

‘At the very least, the current Fed rate should be raised from zero to about 2 percent by the time the next recession is over.’

A ‘Risky Business Model’: David Rosenberg, author and columnist at The New Republic, has said in the past that he would ‘probably’ vote for a rate of zero, and that a policy like that would not be ‘fiscally responsible.’

He wrote on his blog in 2014 that a negative rate ‘would be disastrous for America and the rest of the world.’

And in a piece in October 2017 for The New Yorker, he wrote: ‘I have been convinced for a long time that monetary policy cannot be a reliable indicator of long-run interest rates.’

So what is the view of experts on the Fed?

What are their recommendations?

‘In the end, the key to avoiding a financial crash is to make it clear that a rate that is zero does not guarantee an economic recovery,’ said Paul Krugman in a letter to The New England Journal of Medicine in December 2016.

‘By setting the Fed rate at zero, the economy will never return to normal conditions.

It will never have the money it needs to buy goods and services.’

What are the other theories and explanations?

Some experts are concerned that if the Fed starts running an economic ‘black hole,’ with interest rates rising and inflation falling, the country could end up in a recession.

And that is what the Federal Reserve has done so far in the crisis

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