Now Is The Time For Quantitative Tightening


Digital 3d tunnelQuantitative easing (QE) was an infusion of capital to prevent a potential collapse of the economy, and the FRB’s history of telegraphing their decisions on rates has helped bolster the markets along the way. Contradictory economic data hits them almost daily, making it difficult, if not impossible, to pursue a steady policy or formula. It’s worse than trying to guess where a pinball will go next. You can’t predict chaos.
 
According to the Federal Reserve Act, their monetary policy objectives are to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
 
The interest rate vortex has reached an endpoint, and the world economies are falling into a black hole that only quantitative tightening (QT) may salvage (hopefully, without telegraphing the moves).
 
This has forced people to look to unfavorable alternatives to earn the interest they need. Junk bonds pervade mutual fund holdings as managers strive to beat the competition between reporting periods. Investors are locking up money in non-traded REITs to receive higher payouts (which is mostly a return of their principal). Stock dividend and bond yields are close to record lows and not keeping pace with real inflation. The price to earnings ratio on most stocks are exceedingly high. These are unchartered waters.
 
The psychological impact of low rates on our senior citizens is forcing them to spend less, even when they have the resource to do more. Millennials are disinclined to save where little interest can be earned. … A new direction upward in rates could change the feelings of people throughout the world. Change people’s attitudes, and you will change the results.
 
As I wrote to the FRB in September, 2015, “The time has come to ignore data and send a vote of confidence to the future of our economy … the World economy. Please raise interest rates by 1/4 of a point for the next three quarters starting at your next meeting. … The underlying factors in achieving price stability and moderating market volatility have to be considered for the long run, not just short term fluctuations” and potential disruptions, such as the Brexit.
 
The world needs the vote of confidence that raising rates will bring. This is the influence the FRB needs to implement in July to restore balance in the markets, banking industry, savings rates, and world economy, without letting the short term pain hinder their efforts to prop up rates over the next couple of years.