I am fascinated by the bizarre comments on the Fed's decision to increase interest rates in September following the market turmoil. From the staunch anti-QE Larry Summers to the New York Fed President, William Dudley, the case for adjusting interest rates remains compelling.
Correcting a costly and risky anomaly
It is not an increase, but a correction.
If interest rates are where they are, it is because the Federal Reserve did not deem it appropriate to restore market rates after the impact of their massive Quantitative Easing programs. That anomaly comes with a cost for investors, insurance companies and is the worse disincentive against savings.
From a wealth management viewpoint, it constitutes an appeal to look for more risky investments in order to ensure a minimum yield. QE can only be a short term support for liquidity purpose.
For over four years, every central bank (and in particular the European one) has pushed the system to a limit where there is no adequate remuneration for risks, whether they be maturity or quality. As the dust settles, this will appear as the worst manipulation of markets in the history of central banking around the world.
There is no growth and employment risk in the increase
The grandiose illusion of this modern central banking age is that they have the key to growth and employment. President Janet Yellen has been the champion of that noble cause, but spread the illusion of the direct influence of monetary policy on the real economy. It is by self-usurpation that the extraordinary fall of unemployment in the US is attributed to the Fed policies.
No employer recruits based on small variations in interest rates. The main challenges for the corporate world is to find uses for the trillions of cash they cannot invest and to find investments that will be acceptable to shareholders and management.
The rest is utopia.
The Fed is not at the service of Wall Street
the Fed policy has had two major effects on finance.
Banks have seen their profitability increase to levels that would have made their market capitalization explode, if the Department of Justice had not confiscated $ 150 billion of shareholders' moneys through a series of fines while making sure that the cozy directors and managers do not lose their jobs. The Fed policy is more favorable to banks than to the economy.
The recent overreaction of Wall Street should not deter the course of monetary policy. The impact of China was completely miscalculated by analysts and commentators. Never was the explosion of the over-leverage of the Chinese markets a threat to the US markets, let alone leading to global world recession. After a 150% increase in one year, the Shanghai Composite had to correct.
Wall Street is unable to analyze any complex situation and reacts impulsively, like the neurotics they are. The understanding by broker-dealers of the implications of global situations would not get them any form of A score in an average business school.
Six years of steady and almost linear growth of 100% of the Dow Jones index undeterred by the war in the Middle East, the conflict with Russia on Ukraine and Syria, the decrease of the price of oil, the Eurozone sovereign crisis, China's economic and military evolution and India's slow decline could not affect the optimism on Wall Street: their champion was the Fed and finance was controlling the Fed.
Now is the time
We have had enough of those policies that favor markets and financial institutions to the detriment of the rest of the economy. The Federal Reserve has been waiting too long to correct the current abnormal situation. The IMF is wrong to encourage it to do so.
There is no risk to see Wall Street going down 1,000 points on an increase in interest rates, as we saw for China. The Fed can quietly do what it is supposed to do, and restore the integrity of its monetary policy.