If the U.S. Federal Reserve leaves interest rates unchanged at its Wednesday policy meeting not surprisingly, it will please lots of equity investors who have greatly benefited from the central bank’s zero rate of interest policy over the past six years.
But in other words the old oil filter commercial: Investors will pay now, or pay later.
The Fed’s ongoing reluctance to raise rates might end up doing more harm than good since the longer it waits, the more damage it might foist on stock markets even if investors believe the opposite.
\”Despite [that] commonly held view, I believe that the Fed standing pat on zero and kicking the can in the future on rate hikes may not be such a positive thing in the long term,” said Michael Arone, chief investment strategist at State Street Global Advisors, inside a note to clients.
The U.S. central bank\’s Federal Open Market Committee (FOMC) will release its latest policy statement on Wednesday following two days of deliberation in Washington.
Most economists predict the FOMC will again stand pat on interest rates, with most forecasting a high quality hike in September.
Arone said many policymakers and market observers believe the chance of the Fed raising rates too early exceeds those of moving past too far, pointing towards the premature rate hike in 1937 that exacerbated the truly amazing Depression to support their view.
\”So far now, it seems the very last thing the Fed wants is to repeat that mistake and boost rates prior to the economy are designed for it,\” he said. \”In recent years, the Fed has repeatedly moved its goal posts, seemingly to avoid raising the government funds rate from near zero.\”
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But Arone said comparisons with monetary policy mistakes in 1937 or with Japan’s missteps throughout the 1990s don\’t necessarily jibe using the economic reality facing the U.S. central bank today.
For example, eight years after? the 1929 market crash, consumer prices within the U.S. had fallen with a cumulative 18 per cent and unemployment remained above? 14 percent. But since the 2007 financial crisis, prices south from the border have risen by 16 per cent and the unemployment rates are 5.4 per cent, the same as it was in the boom many years of 1996 and 2004.
\”The U.S. happens to be far from being mired in deflation and low growth as was the situation in the late 1930s or Japan within the 1990s,\” he explained.
Arone also pointed out that U.S. household net worth and the stock exchange are significantly higher today than they were in 1937, suggesting the advantages of the Fed’s current easy monetary policy have diminished, and also the potential risks continue to grow.
By continuing to delay policy action, rates will probably have to be tightened considerably faster than normal once the Fed does bring them up, he said, which may most likely not be great for asset prices.
\”Near-zero rates without doubt helped end the Great Recession,\” he explained. \”?But the US economy is not under emergency conditions or facing the perils of 1937.\”
David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc., agrees that U.S. rates should no longer be at zero, and believes the Fed is becoming too preoccupied with not upsetting the market in the short term rather than thinking about its long-term strategy.
He doesn’t expect the FOMC to boost rates later this week or provide a clear nod as to when it might later on, saying the so-called Greenspan put to prop up asset prices by lowering rates became the Bernanke put and could now be morphing into the Yellen put.
“The Fed continues to bark as it has for more than two years, but seems too scared to bite the marketplace,” Rosenberg said inside a note.