FOMC Follies

The release of the 27 October Federal Open Market Committee minutes shows them edging towards an increase in interest rates. This, despite the fact that we have not fully recovered from the Great Recession, and that history, in the form of the Great Depression, shows that a too-early tightening of the government belt can kill a recovering economy. One part of the summary deserves closer inspection.

A number of participants pointed to various reasons why the Committee should avoid a delay in policy firming [AKA interest rate increase]:

One concern was that such a delay, if the reasons were not well understood by market participants, could increase uncertainty in financial markets

And the FOMC is certainly not cabable of explaining things in a way that hedge fund managers could understand.

and unduly magnify the perceived importance of the beginning of the policy normalization process.

So if the process is so unimportant, what’s the harm in delaying the interest rate increase?

Another concern mentioned was the increasing risk of a buildup of financial imbalances after a prolonged period of very low interest rates.

But so far, as far as I know, no responsible person has suggested that such a buildup is occurring

It was also noted that a decision to defer policy firming could be interpreted as signaling lack of confidence in the strength of the U.S. economy

And of course the fact that we still haven’t closed the gap between current employment and output and the potential employment and output lost in the last near decade is no reason to have a lack of confidence in the current state of the economy in this fragile recovery

or erode the Committee’s credibility.

Because our image is more important than the US economy.

Some participants emphasized that progress toward the Committee’s objectives should be assessed in light of the cumulative gains made to date without placing excessive weight on month-to-month changes in incoming data.

And the overall cumulative progress is nowhere near what it should be or could be, even though we’ve had a good couple of months. It’s almost like the FOMC wants to raise interest rates because they want to raise interest rates and they will grasp any shred of evidence that will let them pretend to have a rationale for doing so.

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