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Why The Fed Shouldn't Wait to Raise Rates -Wells Fargo

Monday, April 13, 2015

There are risks involved in doing nothing two economists contend, referring to the Federal Reserve's signal at its March Open Market Committee (FOMC) meeting that it would further delay the first fed funds rate increase.  Markets now anticipate that the hike will be in September rather than June, a timeline with which Wells Fargo Bank economists John E. Silvia and Michael A. Brown do not agree.  In a special commentary the two said they find "the delay in Fed action concerning given the incentive effects of searching for higher yield and, in turn, the willingness of market actors to take on additional risk when interest rate expectations are flat." They argue that the Fed is behind the curve in lifting the short-term fed funds rate. 

They content there are already signs of risk-taking behavior arising, at least in part from the easy monetary policy that has kept rates exceptionally low for so long.  Increased risk-taking is a by-product of investors seeking higher yields and this is already playing out with large run-ups in high yield debt issuance and greater subprime lending, especially in the auto market.   The two maintain that the longer the Fed waits, the greater the risk that these credit sectors become overheated and result in adverse economic effects.

 

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