Yellen has inherited a complete nightmare. Thursday’s decision to delay the long-awaited liftoff from a zero interest rate illustrates that the world economy is totally screwed. There is a lot of speculation about why the Fed seems so reluctant to “normalize monetary policy”. There are, of course, the typical domestic issues of low inflation and weak wage gains in the face of strong job growth. A hike will increase the Federal deficit. Then there is the argument that corporations now have $12.5 trillion in debt. All that is nice, but with corporate debt, our clients are locking in long-term at these levels, not funding anything short-term. Those clients who have listened are preparing for what is to come, unlike government, who has been forced to shorten the average duration of their debts blindly to what happens when rates rise, which will be set in motion by the markets — not Yellen.
The Fed is really caught between a rock and a very dark place. Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money. The Fed is also caught between domestic policy objectives that dictate that they MUST raise rates or they will bankrupt countless pension funds internationally and emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the U.S. national debt.
By avoiding the normalization of interest rates (hikes), the Fed has encouraged government to spend far more than they realize because money is cheap. This will eventually light the fire under the economy, helping to fuel the Sovereign Debt Crisis. There appears to be no hope for the Fed; they will be forced to raise rates only when they see asset inflation in equities. Then they will have no choice. This is the worst possible mess and the longer they wait to normalize interest rates, the worse the total crisis will become for they will have zero control over the economy. Once that is seen, holy hell will break loose.
