Fed Chair Janet Yellen was before the Senate Banking Committee today in her semiannual monetary policy report to Congress. Fed Chair Yellen described the general process that will lead to rate hikes. First is the change in forward guidance in which words like "patient" will be removed.Then after two additional meetings, the FOMC will be "considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis." All decisions to move toward normalization will depend on economic conditions continuing to improve.
According to this Reuters article, "investors interpreted Yellen's testimony overall as likely indicating a later date for liftoff." Expectations for the first rate hike were moved from September to October of this year.
Fed Chair Yellen received mixed messages from the Senators regarding what they thought about moving toward normalization. Some Senators urged caution about raising rates. A few Senators had the opposite advice. The most vocal was Senator Pat Toomey, a Republican from Pennsylvania. He has a long history of warning about the high cost of this zero interest rate environment on savers and retirees. I first wrote about his support for savers two years ago. In today’s hearing, Senator Toomey made the strong case of why rates should be increased. Below is an excerpt of his opening remarks to Fed Chair Yellen:
Senator Pat Toomey (R-PA):
I can’t help but observe what strikes me as a very obvious paradox here, and that is the financial and economic crisis is over. It’s been over for years, at least 6 or 7 years, and yet we still maintain crisis level interest rates. We got no wave of defaults or massive bankruptcies going on. We have unemployment that has gone from 10% to sub 6%. GDP growth has been weak. I think that’s easily explained by the avalanche of new regulations, certainly not monetary policy, but it has been positive for years. Consumer sentiment is relatively high. The FOMC in January described the economic recovery as solid. Walmart, interestingly, has made an announcement that suggests we might even be approaching NAIRU.
The crisis has been over for a long time, and it’s not as though there is no price to be paid for having this unbelievably accommodative policy. Most immediately, I see the problem incurred by my constituents who may have spent a lifetime working hard, sacrificing, saving, forgoing a vacation they might have taken, forgoing a splurge here and there so they could save for their retirement and buy a CD, have some money on deposit at a bank and use that to supplement a modest pension or social security payments. Of course their reward now is that they get nothing. Zero. That’s what they earn on their savings, year after year.
Meanwhile of course we have all the risks associated with this. The risks of bubbles forming. I would argue that the fixed income markets probably are a huge bubble at the moment. We have the inhibition of price discovery in the financial sector. We facilitate excessive deficits because they look so manageable with the zero rate environment. Credit is rationed.
What are the benefits of this? The benefits, are at best, a timing shift in economic activity. At best we’re moving economic activity that would otherwise occur in the future, closer to the present. As we all know if artificially low interest rates led to strong economic growth, then everyone around the world would have zero interest rates and everything would be booming and that’s not the case. So madam chairman, I know you and I disagree on this, but, I would just suggest that the crisis is clearly long over. I think the time for normalization is well overdue. I hope we get there soon.
These remarks may not change the mind of Fed Chair Yellen, but it may help a little when the Fed starts to have serious discussions later this year about rate hikes. As Senator Toomey said, the financial and economic crisis has been over for many years, and yet we still have crisis level interest rates. That just doesn’t make sense.