Federal Reserve Chairman Ben S. Bernanke’s pledge to keep rates exceptionally low through late 2014 is a mistake with the U.S. economy gaining steam, said John Ryding, chief economist and co-founder of RDQ Economics.
“Why are we still having crisis policy and committing to it for another two and a half years when the economy is getting better and we are not in crisis?” Ryding said in an interview today on Bloomberg Television’s “Surveillance Midday” with Tom Keene.
Ryding said Fed policy makers are trying to rescue the housing market, which is showing signs of recovery on its own. Bernanke, in a speech to homebuilders in Orlando, Florida, on Feb. 10, urged additional steps to heal residential real estate. He repeated that because of slow construction, recovery has been “frustratingly slow.”
“It is like the Fed is fighting the last battle here, even though housing indicators, especially in construction activity and homebuilding optimism, have been getting better,” Ryding said.
While the Fed has pushed its target rate to near zero and sought to reduce long-term rates as well, “It is nonmonetary factors that are holding people back,” the economist said. “Mortgage rates are already low.”
Ryding cited the Taylor Rule, a guideline for setting rates developed by Stanford University professor John Taylor based on inflation and how far growth veers from its long-term potential.
“If you follow the Taylor Rule, the fed funds rate should be somewhere around 2 percent at the present time,” he said. “The Fed should be thinking about exit strategy, not how to get in deeper.”
The Federal Open Market Committee on Jan. 25 released federal funds rate forecasts by policy makers for the first time and said the key rate was likely to stay “exceptionally low” at least through late 2014. The central bank had previously said it would keep borrowing costs low at least until the middle of 2013.
“The Fed has told us raising rates is bad for the economy,” Ryding said. “Actually, in the environment we are in, having a more normal interest rate might be good for the economy. It might be good for those people trying to save. It might be good for the elderly.”
Ryding’s comments echoed Taylor’s view that monetary and fiscal policy should be based on clear rules, without surprise interventions, to lead to better economic performance.
Unemployment can’t be easily influenced by the Fed because it is influenced by structural issues, such as a mismatch of job applicants and skills, he said.
“We’re getting more job openings,” he said. “People aren’t filling those job openings. That speaks to me more of issues of worker retraining to help people get into the jobs they need to get into, than of one of trying to get interest rates down even lower than zero.”
To contact the editor responsible for this story: Christopher Wellisz at email@example.com