Thursday, 18 June 2015

Markets, Not Janet Yellen, Should Set Interest Rates

By Dr Richard M. Ebeling

Financial markets in the United States and around the world are all waiting with “bated breath” for when the Federal Reserve modifies its “easy money” policy and starts to raise interest rates. No one, however, asks a simple question: Why is the American central bank in the interest rate setting business? 

In May 20th, the minutes were released of the April 2015 meeting of the Open Market Committee (OMC) of the Federal Reserve. The Open Market Committee decides when and by how much America’s central bank should intervene into the financial markets to influence the amount of money and credit in the banking system and, therefore, over time, in the U.S. economy as a whole. 

The members, it seems, were still divided as to whether or not the OMC should start nudging interest rates up through monetary policy, or keep them at the low levels they have been at for years, with a majority leaning to not doing so until maybe September. 

In its usual ambiguous language, the published summary of the OMC meeting stated that, “Many participants . . . thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility.” 

The next day, Friday, May 21st, Federal Reserve Chairwoman, Janet Yellen, spoke before the Greater Providence Chamber of Commerce in Rhode Island and said she, “Thinks it will be appropriate at some point this year to take the initial step to raise the federal-funds rate target and begin the process of normalizing monetary policy.” 

But she added that, “The Fed’s objectives of maximum employment and price stability would best be achieved by proceeding cautiously.”