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Why The Fed Shouldn’t Wait to Raise Rates -Wells Fargo

There are
risks involved in doing nothing two economists contend, referring to the
Federal Reserve’s signal at its March Open Market Committee (FOMC) meeting that
it would further delay the first fed funds rate increase.  Markets now anticipate that the hike will be in
September rather than June, a timeline with which Wells Fargo Bank economists John
E. Silvia and Michael A. Brown do not agree. 
In a special commentary the two said they find “the delay in Fed action concerning given the incentive effects of
searching for higher yield and, in turn, the willingness of market actors to take
on additional risk when interest rate expectations are flat.” They argue that
the Fed is behind the curve in lifting the short-term fed funds rate. 

They content there are already signs of
risk-taking behavior arising, at least in part from the easy monetary policy
that has kept rates exceptionally low for so long.  Increased risk-taking is a by-product of
investors seeking higher yields and this is already playing out with large
run-ups in high yield debt issuance and greater subprime lending, especially in
the auto market.   The two maintain that the longer the Fed
waits, the greater the risk that these credit sectors become overheated and
result in adverse economic effects.

 

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