Bob Diamond, former CEO of Barclay’s, went on record with Bloomberg this week and stated that the Federal Reserve needs to raise interest rates so that the central bank could have resources for use in the future, should they need it.
Of late, there has been a significant amount of discussion about whether or not the Fed’s monetary policy is doing more harm than good, potentially backing the Fed into a corner and leaving it without tools for recourse in the event of an upcoming recession. Diamond is the latest voice to chime in, and he knows a little about crises: he helped lead Barclays’ purchase of parts of Lehman brothers after its bankruptcy ten years ago.
“There is no question that we have to continue raising rates and get back to a more normalized level. The thing I worry about is, if there is a crisis or accident, and something has to be done, do we have the tools? Have we used all the ammunition in monetary policy?” Diamond asked on Bloomberg TV this week.
He also states the obvious in noting that the slashing of interest rates and the purchase of $1 trillion in mortgage related securities helped generate a “recovery” after the crisis in 2008. But now, here we are, a decade later and interest rates don’t yet sit above 3%, despite the stock market’s record run over the last decade. And Diamond is concerned by that.
He believes that quantitative easing has left central banks “ill-equipped” to act the next time a crash hits. He believes that it may be difficult for the Fed to raise rates now, especially given the fact that about $8 trillion dollars in US corporate debt comes due by 2020, but that raising them now would certainly be a better option than waiting until we are in the midst of a full blown (probably inflationary) crisis that would force such a move.
The economy can bear the brunt of rate hikes now, and so we should start to get more aggressive as a way to prepare for the future.
Diamond stressed the importance of having options. “We have a recipe for issues, and how we manage through that is the single biggest impact of the financial crisis today,” he told Bloomberg.
Yesterday, we wrote an article about former IMF chief economist Olivier Blanchard, who took the opposite view and didn’t seem to think the Fed was out of tools at all: he suggested that the Fed could start buying stocks, as well as goods and services, during the next recession.
We found it hilarious that economists are only now starting to realize that this lack of firepower could be a detriment to the Federal Reserve in the future. Blanchard stated over the weekend that the Fed could probably handle a small recession, but a more major recession, like the one we experienced in 2008, should prompt the Fed to resort to “previously unheard of policies”.
As we concluded yesterday, nobody seems to realize that the reason we are in a place where central banks had to buy $15 trillion in assets is because of this type of thinking to begin with.
We asked yesterday, “What will this discussion look like in another 10 years, after the next crisis?”
But the only certainty we could arrive at was that every problem we’ll be dealing in the future will be exactly what we deserve.
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