Regarding Rates
With renewed Fed freeze, concern about where to place interest
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The Federal Reserve delighted Wall Street stock speculators and dismayed lenders, savers, community bankers, and others who worry about future price levels and market blowups when it punted Thursday, once again freezing target interest rates at near-zero levels during last week's two-day meeting of its Open Market Committee.
We've been waiting since before the 2008 financial crisis - borrowers in fear, savers and lenders in hope - for the day the Fed finally raised interest-rate targets above their current near-historic lows.
Goldman Sachs boss Lloyd Blankfein, JPMorgan boss Jamie Dimon, ex-Treasury Secretary Lawrence Summers, foreign-securities specialists at Fitch Ratings Inc., and other Wall Street interests had predicted that even a minimal 0.25 percent increase in the federal funds rate would traumatize investors in many markets. "The growth scare is likely enough to delay the Fed's rate hike" until at least December, warned Jason Pride, director of investment strategy at Glenmede Trust, which manages $29 billion in investments.
But "rates have to go up," said Ernest Cecilia, chief investment officer at Bryn Mawr Trust Co. Cheap money forces too many yield-starved (or profit-hungry) investors into bad deals such as mispriced junk bonds, overpriced stocks, and speculative real estate development. And all those years of low savings rates have starved and punished careful savers, including retirees.
Under Chair Janet Yellen, as with Ben Bernanke before her, the Fed's persistent failure to raise rates as hiring and economic output improved spurred criticism that it was too focused on those stock market speculators and junk-bond investors who gain business when low loan and investment-grade bond rates make investors desperate for yield.
The Fed seems reluctant to resume its old mission of ensuring that a healthy banking system is making sustainable loans to business and consumers, Cecilia told me.
"The Fed needs to show leadership," he said. "When they raise rates, there will be stock volatility. But it's the right thing to do, the prudent thing to do."
Of course, cheap money is good for business borrowers and consumers. And higher rates do tend to boost bank profits.
But bankers insist that there's more at stake. With the Fed's own balance sheet still weighed down by trillions of dollars in bank reserves and old mortgage debt it bought to stabilize lenders during the 2008-09 financial crisis, the effective Fed funds rate - the price banks pay for money, a benchmark for loan and bond interest rates - has been sitting down around 0.14 percent, a fraction of the 40-year average 5.95 percent, Cecilia noted.
That has left the Fed with little leverage for one of its most basic jobs: making money cheaper to ease the next financial shock. "The Fed needs to put that tool back in its toolbox," Cecilia told me.
Bankers and economists see distant but persistent signs of inflation: shortages of young and skilled workers; junk-bond interest rates so low they don't appear to cover the likelihood of default; construction and investment loans at too-easy terms, given the risks.
What role will the new Philadelphia Federal Reserve Bank president, Patrick Harker, previously president of the University of Delaware and dean of the Wharton School, play in deliberations hereafter?
His predecessor, Charles I. Plosser, "was a hawk" who pushed for interest-rate hikes, noted Ted Peters, who served on the Fed board with Harker when Peters was chairman of Bryn Mawr Trust Co. (Harker will rotate onto the policy-setting Board of Governors in 2017; his role for now is more consultative.)
As a former chief executive who had to meet payroll at large, politically charged institutions, Harker brings "a very practical outlook and expensive experience in tough situations" to the ivory-tower Fed ranks, said Peters, who now heads the Main Line-based Bluestone Financial Institutions Fund, which buys bank stocks.
Peters said he and Harker were both influenced by Plosser's insistence that artificially low interest rates can warp the economy and encourage extra borrowing and speculation that "misallocates resources." Harker "is very, very up to speed on what is going on," he added.
Still, despite Plosser's influence, hiring is up, energy and food prices are flat or down, and Peters said he expects Harker to vote most often for higher rates in the near future.
Two-and-a-half months into his term, Harker hasn't yet made public speeches to outline his positions. Spokesman Jim Ely says that's not unusual for a new Fed regional bank president.
What is unusual, compared with some government agencies, is the Philadelphia Fed's practice of not making public a list or schedule of the business and financial leaders Harker is meeting with privately.
"Unlike other [Federal Reserve] districts, we do not release the log," Ely told me.
"We are talking about advisory council meetings and things that are quite usual," he added. Harker is scheduled to address a public Fed conference in Philadelphia and address questions in December.
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