Malpass: The Fed has a Mental Block

Federal Reserve Chairwoman Janet Yellen

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.

E.J. Smith - Your Survival Guy

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E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.