Monetary Policy and Financial Exuberance

This note came in from Seeking Alpha’s Wall Street Breakfast:

The Chicago Fed’s Charles Evans doesn’t expect the first rate hike until the 2nd half of 2015 – somewhat later than Yellen’s “six-month” (from QE’s end) remark which suggested a boost as soon as April 2015. Speaking to reporters after his speech, Evans suggested holding off on hikes until 2016 could be appropriate given the state of the economy. Nevertheless, Evans sees a Fed Funds rate of 1.25% by the end of 2016 – the low end of FOMC guesses, but 25 basis points higher than his forecast three months ago. As for hiking rates to cool “financial exuberance” – an idea seeming to gain a little traction with some Fed members in recent days – Evans says “monetary policy is not the best tool to mitigate this risk.”

From my perspective leading up to 2007, monetary policy was the cause of financial exuberance. It seems to me it should also be part of the solution. Is it the best tool to mitigate the risk? Perhaps not, but of the remaining tools (fiscal policy, taxes, and regulation), it is the only one available right now to be used.There doesn’t seem to be any resolve in the chambers of Congress to even acknowledge this risk exists.

Sometimes waiting for the best tool to become available starts to look like indifference. This could lead us to the same outcome as we saw in 2008. I do not condone this level of abdication of responsibility. I especially dislike it when those who perpetrate the situation tell us the problem now is ours to resolve.


Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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