My position, stated often in these comments, is that the Federal Reserve is executing a monetary policy that is not gradual and not well thought out. The Fed is too tight. It is shrinking its balance sheet much too rapidly (over 6 percent this year) and it is raising interest rates much too quickly. The assumption that the United States economy can absorb higher rates with slower money supply growth represents a massive change in Fed thinking.
For decades, the economy has functioned with the belief that the Greenspan “put” or the Bernanke “ease” will always be there. The belief was that economy need never worry about fund availability. Now one must question these beliefs. In so doing, the prudent decision will be to conserve capital and use it internally to fund operations.
The Fed must and, in my view, will reverse policy. Silly concepts like “neutral interest rates” will be thrown back into the dustbin of PR hype where they belong. The average Fed Funds rate from July 1954, when it was initiated, to the present has been 4.80 percent. The average Fed Funds rate in this century has been 1.71 percent. There is no “neutral rate” in these numbers.
It is time for straight thinking and realistic policy. The United States cannot shift from a financial system characterized by “free” amounts of unlimited money supply to one driven by costly funds that are not easily acquired. It cannot fund the growth in the economy, growth in the equity markets, and growth in the Federal deficit with a reduced rate of growth in its money supply.
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