David Malpass writes in the Wall Street Journal that the Fed hasn’t recognized the poor results of its policy making. Without realizing its ineffectiveness the Fed won’t be able to make the necessary course corrections.
On Wednesday Fed Chair Janet Yellen emphasized that the Fed is data dependent, implying that the economy will have to do better to win rate hikes. Due to recent membership changes, the voting members of the FOMC are particularly inclined to keeping rates low. The problem is that the Fed’s track record each year since 2011 has been to lower its forecast during the calendar year rather than raise it. If the economy again disappoints the Fed, the decision to hike rates will get harder as the year progresses.
The latest waffling over the timing of rate hikes has another negative effect. The Fed says it wants to keep reinvesting its staggering $4.5 trillion bond portfolio until after rate hikes get under way. That means more months or years with the Fed buying massive amounts of long-term bonds as short-term bonds mature. As a result, any delay in rate hikes keeps the Fed at the center of bond market distortions that much longer, slowing growth.
This is all happening in the context of weak foreign currencies and growth rates, referred to discreetly in Wednesday’s FOMC statement. That provides another excuse for delay.
Last but not least, there was no hint in Wednesday’s statement that the Fed recognizes its policies haven’t worked well. By itself, that mental block adds to the risk of slower growth and further delays in rate hikes.