Crisis Averted – Fed in Denial

While we appreciate the Fed's intentions to stimulate job growth and the economy, we are a bit baffled by their decision to keep rates at virtually zero. This epic accomodative stance was implemented to avert a deeper financial crisis. We also commend them on this effort as it likely served its purpose effectively.

However, at this juncture, rates at this level do not seem to be doing anything to create jobs or stimulate lending and the economy has once again begun to grow. It would seem to us, now that the crisis has been averted, that rates should be returned to normally accomodative levels, gradually increasing up to 1% and then 2% over the next year or so.

Perhaps Bernanke and Company should take a page out of the Aussie central bank's play book. Last month the Reserve Bank of Australia raised rates 25 basis points to 3.25%. Granted the commodity-based economy down under has some different circumstances, but they seem to have it right that the global economy is on the mend. Here's an excerpt from Governor Glenn Stevens' October 6 statement:

"In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."
Click here for the full story...http://www.rba.gov.au/MediaReleases/2009/mr-09-23.html