Jim Grant: The Fed Missed Its Chance; It Can’t Normalize Rates Now

Although it seems to be almost a foregone conclusion in most circles at this point, not every analyst believes the Federal Reserve will hike rates in June, or if they do that it means a long-term upward trajectory.

Jim Rickards recently appeared on RT’s Boom Bust and said he thought a rate hike was unlikely, and if the Fed does act, it will spur a nasty market crash. In his most recent podcast, Peter Schiff agreed, saying even if the Fed does nudge the rate up a quarter point next month it isn’t going to matter. That will be the end of it, then the Fed will cut. [Scroll Down to listen to the podcast.] And Earlier this week, Jim Grant weighed in on Fox Business and said the Federal Reserve probably won’t raise rates because the economy is just slogging along:

The Federal Reserve will not act. The Fed I think it wants to. I think it would love to normalize things, but I think it has missed its chance. As they say on Wall Street, it missed its market…I don’t want to dogmatize too much, but my opinion is no rate hike.”

Grant went on to engage in a wide-ranging discussion focusing on how central bank policy distorts the economy. Low interest rates accelerate consumption and defer problems. Companies and individuals can take advantage of easy credit and push things into the future. But eventually, this piling on of debt catches up and the whole thing comes crashing down.

The intellectual framework by which the Fed directs our monetary fortunes has been shown to be ineffective at anticipating the future, which they say they are in the business to do.”

Highlights from the Interview:

“I think the economy is slogging along…We are more or less sleepwalking. There is nothing like zest, nothing like the dynamism that so often is associated with America’s economy.”

“The Federal Reserve will not act. The Fed I think it wants to. I think it would love to normalize things, but I think it has missed its chance. As they say on Wall Street, it missed its market…I don’t want to dogmatize too much, but my opinion is no rate hike.”

“I think there is kind of bubbling trouble in credit. I think what you see is people have stretched and strained to consume as they’ve been accustom to doing. The trouble with stretching and straining without adequate income is you go into debt. And we see a lot of emerging debt troubles throughout the wholesale and retail economy…Subprime auto loans is one glaring example.”

“One of the troubles with ultra-low rates is they do two things. They accelerate consumption. They bring it forward in time. And also they defer problems because companies that in what a normal rate structure would be denied access to credit are able to borrow and thereby to perpetuate corporate lives that might well in a more dynamic economy be ended, and thereby leaving space for newcomers.”

“What we think is that the consumption will continue to weaken owing to the burden of debt, and the bankruptcies, having been postponed through ultra-low and abnormally low rates will be piling up in the near future.”

“Isn’t this a market economy? And aren’t interest rates prices? Ought not prices be discovered rather than administered? I mean, this is the great question. I wish the Wall Street Journal would take this up a little more.”

“This is an ultra-long business expansion, as lethargic as it has been it’s been a very long-lived one. They say expansions don’t die of old age, but to a degree they do because of the distortions introduced, among other things.”

I am negative on them [negative interest rates]. They are an arithmetic absurdity. And I think they are the manifestation of the conceits of the Ph.D. standard of monetary management…we have 700 Ph.Ds. We either need 701 or many fewer because it is not working.”

“Skin-deep diversity [in central bankers] is no good. What we want are people who think differently.”

“The intellectual framework by which the Fed directs our monetary fortunes has been shown to be ineffective at anticipating the future, which they say they are in the business to do.”

“When the basic wholesale rate is zero, or thereabouts, the spread is necessarily narrow. And we have been in a 35 year or so bull market in bonds, meaning interest rates have fallen for the length of an entire Wall Street career. This is muscle memory. People project the recent past into the indefinite future. So I think the Fed does more than influence. It is a powerful force – I think for distortion.”

“I don’t think Janet Yellen the person is the problem. I think Janet Yellen the type is the problem…Apart from Janet, what she represents is the triumph of the professional economist managing central banking affairs.”

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