An article came out in the WSJ web site called Lenders Look to Fed Tapering to Lift Business Borrowing.
One would think that tapering would discourage borrowing. Yet, we are in a situation where long-term low interest rates suppress borrowing. Here is the key line from the article referring to tapering…
“Such a move would bring “some degree of certainty back to the” corporate market, Mr. Demchak said, adding that businesses could “see that as a sign of the economy coming back,” giving them more confidence to borrow.”
The Fed would do better to have forward guidance to normal monetary policy in the near-term. Business would respond better to such a policy. Instead, forward guidance has been pointing toward a far away negative real interest rate with the implication that the US economy is in long-term decline… not a good message to motivate business.
People respond better with deadlines and constraints …
- Students study more right before a test.
- People do not feel comfortable to cross a bridge without side railings.
As it is, I already see that a tighter monetary policy fits better due to a fall in the natural level of real GDP. But, psychologically businesses would feel more secure with a rising Fed rate. It is a sign of growth that would generate more and more investment. Remember, businesses invested just fine during the unnaturally high real interest rates of the 1980’s.
The Fed needs to start putting some psychological bite in monetary policy.