It’s now or never for the Fed. If the central bank of the United States does not raise short term interest rates during the meeting of the Federal Open Market Committee in December, then the Fed will lose all credibility and be seen as a political arm of the White House, keeping rates low to help the party in power remain in power. Keeping short term rates at this low level for such a record period also has the added benefit of enabling the United States to continue to rack up unsustainable debt levels that can never be serviced at a market interest rate.
In addition to the image risk that the free money policy entails, the fact that the Fed has no interest rate arrows in its quiver to use in a serious, global financial crisis is also quite disturbing.Yes, the Fed has many other monetary tools available but interest rates are symbolic as well as effective in managing downside risk to an economy. Rates this low for this long is simply a wrong-headed policy.
The Fed does not have to embark on a campaign to raise the short term cost of borrowing to restrictive levels and tighten monetary conditions past what is considered ‘normal.’ Quite the opposite, all the Fed has to do is remove the excessive accommodation. In other words, we just need to get back to a realistic level of interest rates, one that will be healthy for the American economy in the long run.
Howard Lutnick, CEO of Cantor Fitzgerald, said recently, “They need to get it off the ground,” said Lutnick. “They’re no reason for them to be talking about it anymore – what’s a quarter of a percent anyway? It’ll buy us all coffee,” he joked. “It’s not a real rate. Our whole lives, did any of us actually think a quarter of a percent was actually an interest rate?” he added.
Speaking of the economy, investors and allocators of capital will see a rise in short term rates as a healthy signal, an indication that it’s ok to start investing in new infrastructure, new capital spending. This is what has been missing in the anemic, American recovery. Companies are flush with cash and it needs to be deployed to create jobs and economic growth. The Fed cannot be so fixated on limiting damage to the equity markets with a rate rise. Yes, there will be a short-term correction, if it hasn’t already been priced in, in the equity indexes.However, this downturn will be short lived. Once corporations have priced in the new cost of money, which will not be difficult to digest, the markets will rally on the new found economic confidence.
Yes, the U.S. Dollar will get stronger. However, this should not be feared. American exports will become more expensive.However, if a new adminstration, after the coming election, can focus on removing excessive government regulation and interference in the private sector in America, then the strong dollar effects can be mitigated.
It’ time for the Fed to act.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction. His first of several thriller novels, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, Washington Times, and others. LToddWood.com