WSJ: "Bad Timing" of Rate Hike
The Wall Street Journal published commentary by Gerald O'Driscoll, senior fellow at the Cato Institute and former vice president at the Federal Reserve Bank of Dallas, called "The Fed Flirts With the Right Move at the Wrong Time." He writes, "Financial markets and Federal Reserve watchers are focused on when the Federal Open Market Committee will vote to raise short-term interest rates, likely by 25 basis points. Investors and pundits would do better to ask why the Fed would raise rates now, when the arguments against a hike are so strong. The shudder felt through the global financial markets over the past few weeks, culminating on Friday with the Dow plunging more than 500 points, should give anyone pause about a Fed course change in the coming weeks or months. Let me be clear: I belong to the camp that has long argued for the Fed to raise short-term interest rates. The more the Fed held rates down, the more economic distortions its policy created.... Artificially low rates cause investors to chase yields and take on more risk. That was a goal of the Fed's extraordinary monetary policy (though it was stated more euphemistically). And near-zero rates harm savers and those living on retirement income, so the policy is inherently and perversely redistributional.... The question is why now, after seven years? It can't be for any of the standard criteria traditionally employed by the FOMC in its decision-making." It continues, "Low interest rates were thought to be stimulative. But we have learned that financial intermediaries struggle with spreads in a low-interest-rate environment. Hardest hit must surely be the money-market mutual-fund industry. Absent a dangerous lunge for risky returns, how much longer can that industry cope with the current interest-rate policy? One suspects that some combination of these motivations, reflecting a concern for financial stability, is behind the call for higher interest rates. To one degree or another, the concern is appropriate -- but that has been the case for many years. Now it appears that the FOMC is at last poised to do the right thing, but with bad timing." In other news, Bloomberg wrote Friday, "Treasuries Aren't So Special in Repo Market as Fed Bets Deferred." It says, "The $1.6 trillion market where dealers go to borrow U.S. government debt is adding to signs that Treasury bears are in retreat less than a month before a potential Federal Reserve interest-rate increase. Typically, when there is heightened interest in shorting Treasuries -- meaning bet they'll decline -- the securities are in demand in the repurchase agreement market as traders try to obtain the debt to sell. In the argot of repo traders, that's known as being "on special." Yet that phenomenon is barely in evidence, signaling traders aren't gearing up for bond losses with the Fed's Sept. 17 decision looming."
