We recently reported that bankers around the world have started to express concern about the rapidly inflating stock market bubble, and its future impact on the world economy. While many in the mainstream banking world agree the problem exists, they see different causes and call for different solutions. Some worry the Fed might raise rates and end expansionary policies too quickly. Some fear the central bankers may not do it fast enough. These contrasting concerns reveal the tight spot the Fed finds itself in. Yellen has put herself between a rock and a hard place. If she tightens, she risks bursting the bubbles. If she doesn’t, she risks inflating bubbles further, leading to an even bigger crash when they finally burst.
The following article by Thorsten Polleit was originally published by the Mises Institute Fed Watch. It offers some in-depth analysis on the options the Fed faces along with a gloomy conclusion. No matter what, it will remain on a course to trouble.
The Federal Reserve is widely expected to continue to tighten its monetary policy this year. According to a latest Reuters Poll, the Fed is likely to start shrinking its US$4 trillion balance sheet in September and, moreover, raise further its key interest rate, which is currently standing in a range of 1.0 to 1.25%, in the fourth quarter this year.
According to mainstream economic wisdom, the time has come for the US economy to return to a more normal level of interest rates. Industrial output is expanding at a decent clip, official unemployment has declined markedly, and prices in the stock and housing market show a sustained upward drift. Considering these circumstances, the US economy can now shoulder a tighter monetary policy, it is said.
This post was published at Schiffgold on AUGUST 7, 2017.