Thursday, January 26, 2012
The Fed Learns from Japan
Recent economic data has shown some improvement in the economy. Unemployment is still too high, but at least the unemployment rate is moving lower, not higher. Housing is also showing some signs of trying to find a bottom, helped by record low mortgage rates. And bank loan demand is picking up, albeit from very depressed levels.
So it's interesting that the Fed is committed to an easy monetary policy rather than tightening, as so many were expecting. Moreover, according to the New York Times, the majority of Fed governors may not want to raise rates until 2015:
...the Fed published for the first time the predictions of the committee’s members on when they would raise interest rates. It showed that 11 of the 17 members expected the Fed to raise rates by the end of 2014. Taken together, the documents suggested that the Fed expected to keep rates near zero until late 2014, but probably not any longer than that.
To me, this shows that the Fed has taken the Japanese experience of the past two decades to heart.
In the 1990's, after the land and stock markets imploded, Japanese officials gradually reduced interest rates to almost 0% in an effort to try to revive their economy. This of course is very similar to what the Fed has done in this country.
However, the Bank of Japan was constantly looking for opportunities to raise rates again, as many in Japan felt that low interest rates were imposing a harsh burden on savers. So, every time economic data indicated that Japan's economy was reviving, the BOJ would start to raise interest rates. Unfortunately, the BOJ's move to tighten credit would usually interrupt the economic revival, and they would be forced to loosen credit again.
Fed Chairman Bernanke studied the Great Depression of the 1930's in great detail while he was a professor at Princeton. Because of his background, Bernanke was a fairly vocal critic of the BOJ's actions in the 1990's, because he felt their actions were either too cautious or too precipitous in raising interest rates too soon.
Hence yesterday's announcement.
To me, this means that savers are going to be forced to make a decision: keep their funds in a bank or money market account earning essentially nothing for the next few years, or invest some of their savings in stocks or bonds. And with interest rates on bonds at 60 year lows, it seems more likely that we will eventually start to see more flows into the stock market.
I think that Bernanke's moves have mostly been good ones, even though many of this year's Presidential candidates have used the Fed and Bernanke as one of their favorite punching bags.
The Washington Post carried a good piece this morning discussing the Chairman's almost zen-like calmness in the face of often withering criticism:
Newt Gingrich called Bernanke “the most inflationary, dangerous and power-centered chairman of the Fed in the history of the Fed.” Ron Paul accused Bernanke of “inflating twice as fast as Greenspan.” Mitt Romney joined the others in saying he wouldn’t reappoint Bernanke, who was first appointed by President George W. Bush.
On Wednesday, Bernanke allowed himself just a passing reference to such critics. “The low level of inflation is a validation,” he said. “There are some who were very concerned that our balance-sheet policies and the like would lead to high inflation. There’s certainly no sign of that yet.”
He deserves credit for keeping his equanimity as the Republican candidates abuse him. And, at long last, he has some results to show for the work he has done.