From The Wall Street Journal:
Fed leader also reiterates concerns about risks to the U.S. economy in Senate testimony
By Jon Hilsenrath | Updated February 11, 2016 4:52 p.m. ET
Federal Reserve Chairwoman Janet Yellen on Thursday said the U.S. central bank is studying the feasibility of pushing short-term interest rates into negative territory should it need to give the economy an added boost.
Central banks in Europe and Japan have introduced negative short-term rates, meaning they are charging banks that leave money on deposit with them. It is meant to encourage them to lend the money out rather than park it for safe-keeping.
Ms. Yellen told the Senate Banking Committee she didn’t think the Fed would need to do this, but it should be prepared to do so if the economy sinks and such a step is needed.
The Fed considered negative rates in 2010. “We are taking a look at them again,” Ms. Yellen said in her second of two days of testimony to Congress.
That was a striking admission. The Fed lifted short-term rates in December after keeping them near zero for seven years. With the jobless rate falling, officials had believed they were getting the economy closer to full health and expected to follow-up with four quarter-percentage-point rate increases this year.
There’s more at the original.
The economic experts at the Federal Reserve had been hinting for half a year and more that they’d raise interest rates a tad before they finally got around to doing it in December. With all of the hints, the interest rate increase had already been factored in to investors’ economic decisions. Now, oops! things aren’t going all that well, and the stock market has turned decidedly bearish. After eight years of a (slow) bull market, that’s not exactly surprising.
But the real problem is the government thinking that it can control and ‘adjust’ the economy. The economy is 250 million people taking billions of economic decisions every single day, and the Obama Administration and the Fed think that they can somehow manage that? We allow our political leaders to take credit for a good economy, and get away with blaming the previous Administration for a not-so-good one; it’s hardly a surprise that politicians run on the economy when and where they can. But anyone who believes that the government can control the economy is deluding himself; even in the command economy of the Soviet Union and the other communist states, while the governments could restrict choices and options, they couldn’t control the economies, which is why those states all failed. The People’s Republic of China survived by switching to a capitalist economy. The most that the government can do is make it easier or more difficult for the economy and the people within it to succeed, and our government tends to make things more difficult rather than easier.
The wisest course of action would be for the Fed to simply leave things alone. Stop trying to tinker with an economy they can’t manage or control, and let individuals take their economic decisions based on a consistent policy, rather than not having any idea what government will do next.
Cross-posted on The First Street Journal.