Former Fed Insider: Tail Is Wagging the Dog; Fed Needs to Raise Rates (Video)

Danielle DiMartino was a former advisor to Richard Fisher, the president of the Dallas Federal Reserve. On CNBC this week, DiMartino identified herself as an economist more concerned with the power of free markets when she cited Ludwig von Mises as one of her personal heroes. She went on to share insights into the Fed’s policy-making strategies and why the Fed has painted itself into a corner.

I would have to side with the body of thought that says the Fed has relied too long on models. It has not paid enough attention to financial stability and the seeds that are sown when interest rates are kept too low for too long. The result is never one that’s beneficial. Not for Wall Street or Main Street…”

DiMartino isn’t the only Fed insider to question the Janet Yellen’s incompetent policy and the official narrative of an economic recovery. Alan Greenspan himself has recently critiqued Fed policy and warned investors that the US economic outlook isn’t very rosy.

In this first video segment, DiMartino explains why the Fed has been incapable of predicting and noticing bubbles. She thinks that there are a number of bubbles forming right now, both domestically and abroad.

In the second part of her conversation with CNBC, DiMartino shares her personal opinion on whether or not the Fed will raise rates this year. Much like Peter Schiff, she points out that given the Fed’s own goal posts, rate hikes should definitely be taking place. However, she also notes that the Fed has an unfortunate history of moving its goal posts.

I think if they don’t raise rates this year that the signal will actually be more negative… There’s been enough justification given the current goal posts. I don’t know if they’ll move them again. They’ve moved them constantly. I hope they don’t. But given where the current goal posts are, I would have to say that the justification is there, even if it calls for canceling Christmas and raising rates in December.”

Highlights from Video 1:

“I was kind of on the outside looking in for the better part of a decade when I was at the Fed. I used to joke with Fisher all the time that instead of quantitative easing, that we should have called it quantitative pleasing. It always seemed like the tail was wagging the dog. That policymakers were allowing the markets to dictate how policy should be made, instead of the other way around. That type of thinking can definitely get central bankers in trouble…

“Ludwig von Mises is my long-departed hero. He coined the term ‘malinvestment.’ He wrote about it extensively in the mid-1900s. I think in the case of the housing crisis, for example, there was a very identifiable bubble. There was an outlet for that malinvestment. I think today, though, that we’re dealing with several bubbles. Now that central bankers around the world are engaged in a currency war of sorts, I think it’s gone global. I worry about the credit markets. Quite a bit. I worry about the stock markets. I worry about the commercial real estate market. You name it…

“I speak as a former outsider who worked on the inside. I see the world through the prism of the markets. That’s my background. I’m not a PhD in Economics. I would have to side with the body of thought that says the Fed has relied too long on models. It has not paid enough attention to financial stability and the seeds that are sown when interest rates are kept too low for too long. The result is never one that’s beneficial. Not for Wall Street or Main Street…

“No, there is certainly not [that conversation between the regional Federal Reserve staff members and Yellen’s staff.] But I’ll tell you that for all the years that I worked for Fisher. He told me himself that there was never a time when he didn’t take the analysis that I had provided with him and place it at the table at the Federal Open Market Committee Meetings. The issues of the markets and financial stability were constantly being raised, I can tell you by Fisher and, you know, the other well-known hawks. Unfortunately, I don’t think there are quite enough voices of dissension today on the committee.”

Highlights from Video 2:

“I think the market has grown accustomed to not being shocked. I think this Fed, again, has allowed the tail to wag the dog. It is so afraid of upsetting the apple cart. On the other hand, after nine years of inaction, I think that the risk is that the Fed’s credibility itself is at stake, because they don’t feel they can come out and disrupt the markets. At some point, you’ve backed yourself into a very tight corner. And they’re in the tightest corner they’ve been in right now. They’re data dependent…

“I think if they don’t raise rates this year, with all due deference to the IMF and the World Bank… I think if they don’t raise rates this year that the signal will actually be more negative… There’s been enough justification given the current goal posts. I don’t know if they’ll move them again. They’ve moved them constantly. I hope they don’t. But given where the current goal posts are, I would have to say that the justification is there, even if it calls for canceling Christmas and raising rates in December. Even if they don’t hike in September…”

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