Deutsche Bank Economist: The Fed Is in Danger of Making a Mistake of Historical Proportions

Central banks can make mistakes.

Folkerts-Landau: Fed's Mistake of Historical Proportions

David Folkerts-Landau, global head of research at Deutsche Bank, says that staying at the zero bound of monetary policy for any longer would be a historic mistake.

On Bloomberg Surveillance this morning he warned:

To stay here [at zero], I believe, would be a mistake of historical proportions. They should have done it [raised interest rates] already. You may think that is an arrogant statement, but remember central banks make mistakes. If I had told you in 2003 that Greenspan was wrong, you would have said that was an arrogant statement, but he was wrong. If you go back to 1925 just when we're back on the gold standard, a huge mistake. So we shouldn't be afraid to say central banks make mistakes and I think this has been a fundamental mistake. They should have gone significantly before to remove that uncertainty, to allow Capex to develop, and to just take that big uncertainty out of the system. 

He may have to wait a while longer. While a number of Fed officials have voiced support for a rate rise before the end of the year, the market remains skeptical. According to Bloomberg data, less than 40 percent of those surveyed believe the central bank will raise interest rates before 2015 is out.

To even get that probability above 50 percent, you have to go all the way out to March of 2016 when a number of leading economists including Michael Gapen at Barlcays and Deutsche Bank's own Joseph Lavorgna see a rate hike (finally) coming. Here's a snapshot of the market's current expectations:

 

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