With the crisis clearly past, the Fed ought to boost short-term rates to a more normal 2% - still low by historical standards - to send a signal to the markets that the U.S. is serious about supporting its beleaguered currency and that the worst is over for the global economy. Years of low short rates helped create the housing bubble, and the Fed risks fostering another financial bubble with its current policies.
Like the Washington Post commentary that I described in this Wednesday post, the Barron's article also mentions the harm being done to savers:
It's also time for the Fed to consider the plight of the country's savers, who now are getting less than 1% yields on money market funds and who are being forced to take substantial interest-rate or credit risk if they want higher yields. "The Fed is punishing prudent people and rewarding profligate people," one veteran investor tells Barron's.
It's nice to see yet another media article mention the harm that the current policies have on prudent savers while reckless behavior is being rewarded.
The article is realistic about the near-term chances of a rate hike by the Fed. It's very unlikely:
Our view unquestionably is an outlier. With unemployment near 10%, few see a need for higher rates. And Fed chairman Ben Bernanke, while acknowledging that the Fed will need to pursue an "exit strategy" and tighten monetary policy, clearly wants to act later rather than sooner.
As this Calculated Risk blog post described, a rate hike before 2011 is unlikely based on unemployment and the Fed's history in past recessions. Hopefully, this Barron's commentary will spark more review of the economic strategy which will lead the Fed to act before high inflation and new bubbles are created.
Thanks to the reader who emailed me the link to this article.