11 Feb Janet Yellen’s Debut and the Cause of Low Interest Rates
From Janet Yellen’s first Congressional testimony as the new Chairman of the Federal Reserve:
“The fundamental reason we have low interest rates is because there is a glut of savings relative to the demand for those savings.”
Really? Would you like to test that theory? Pull off the easy monetary policy – the bond buying – the zero interest rate Fed Funds policy – and let’s see where the “natural” rate goes … The idea that the Fed should manipulate the basic interest rate to generate a desired economic result is not an economic policy I agree with, but it is an acceptable idea in modern economics. Calling it that is at least honest (meaning, calling it the controlling of rates to generate a desired outcome). But saying that the rate is low because those gosh-darn savers are holding on to too much money is fundamentally dishonest, and the extremely bright Ms. Yellen knows it.
The reality is that the economy is weak enough that we would have a below average interest rate if it were not being held down via excessive accommodation. But it wouldn’t be this low, and the chairman knows it. Of course the Fed agrees with me here, because otherwise, why would they be doing it?
What the hangover result will be from this period of monetary accommodation is not something I can predict. I repudiate the folks who claim with confident hubris, despite a couple generations of being embarrassingly wrong, that hyper-inflation will be the result. But I find it incontestable that severe malinvestment is a highly likely outcome from this regime of monetary policy. Incontestable. Regardless, the driver behind low rates (at least rates this low) is not “excess savings unable to find investment demand”. Differing economic belief systems are one thing. Fundamental honesty is another.