Feldstein warns Fed's delay in raising rates is "dangerous."

In his essay in today's WSJ, Feldstein says, among other things, the following:

• "For price stability, the Fed since 2012 has interpreted its mandate as a long-term inflation rate of 2%. Although it has achieved full employment, the Fed continues to maintain excessively low interest rates in order to move toward its inflation target. This has created substantial risks that could lead to another financial crisis and economic downturn.
• "The S&P 500 price-earnings ratio is more than 50% above its historic average. Commercial real estate is priced as if low bond yields will last forever. Banks and other lenders are lending to lower quality borrowers and making loans with fewer conditions.
• "When interest rates return to normal there will be substantial losses to investors, lenders and borrowers. The adverse impact on the overall economy could be very serious.
• "With a margin of error that large, it makes no sense to focus monetary policy on trying to hit a precise inflation target. The problem that consumers care about and that should be the subject of Fed policy is avoiding a return to the rapidly rising inflation that took measured inflation from less than 2% in 1965 to 5% in 1970 and to more than 12% in 1980."

So Feldstein says the Fed should be worrying about speculation and inflation. The markets, and probably most Fed governors, are worrying about a lack of speculation and deflation.

Who is right? The monetarist Feldman or the Keynesian consensus? What I worry about is the possibility the central banks have created an unstable situation that they will at some point be unable to control.


Lincoln

The ECB and Germany play a confusing blame game

German finance minister Schauble blames the ECB for the rise of populist parties, which he attributes in part to the ECB's easy money policy. He thinks they should tighten up.

In reply, ECB Chairman Draghi mostly blames Germany for Europe's woes and for making the ECB adopt an easy money policy. According to Draghi, Germany's high savings rate compared to its neighbors is somehow forcing the ECB to stimulate because Germans are refusing to go into debt and splurge on consumption items.

Meanwhile, Europe's first quarter economy grew at a 2.4% annual rate (0.6%) with no inflation. This is a great result and the previous quarter was also good. Draghi, however, is unhappy because the inflation rate is too low in relation to the growth rate. (WSJ, A14)

I find this all very Kafkaesque.

"All power to the Soviets!" Central bank overreach in Sweden and elsewhere

I remembered Lenin's phrase "All power to the Soviets!" when I read this morning that Stefan Ingves, head of Sweden's central bank, thinks that the bank should have more power over the economy. Specifically, the Financial Supervisory Authority (FSA) is standing in the way of the central bank's direct regulation of the housing market. Ingves proposes that the FSA be merged into the central bank. (i.e. eliminated and its authority given to the CB)

Sweden's economy grew 4.5% last year and is expected to grow 3.5% this year. The central bank lending rate is -0.5%. (I believe that Sweden was the first to go negative.) The bank has also done the requisite quantitative easing. The fly in the ointment is that inflation is only 0.4% whilst the target is 2.0%.

Personally, I don't see why stable prices and a booming economy is not considered a good enough result. The Central bank, which seems quite pleased with itself, says, however, that it needs more power so that things will be even better.

It's human nature: everyone thinks he ought to have more power.