Has the Fed Got It Wrong Again?

 |  Includes: TBT, TLT
by: Michael Levy

The economy may not be great, however, it is not that bad either and it certainly does not warrant short tem interest rates at Zero.

All this is now doing is sending the wrong signals to the markets and creating fear. The Fed did a good job at containing the financial meltdown two years ago, but it was late in the day when they acted then and they may be late in the day once again by keep interest rates so low.

Homes are not selling because they are still too expensive, it is that simple. Mortgage rates are at an all time low at 4.65% for a 30 year mortgage and yet home sales are slipping lower.

Clearly lower rates are not helping the sale of homes. At the same time short term interest rates are at an all time low, so savers are getting little to no interest on their money.

Japan has kept interest rates low for the past 12 years and in all that time their economy has been struggling. If short term interest rates in the USA slowly went up by half a percent each month, for the next four months, until it reached 2% it would send a signal to the markets that things are not so bad after all. In reality, 90% of the people are still in work and most corporate profits are going higher.

Higher rates would take the fear factor out of the Treasury bubble and would also pop the gold bubble. Mortgages would go up to 6.65% and home prices would come down another 10% at the low end and 30% at the higher end. They will do that anyway over the next 12 months so why not advance the process now, take the medicine and barring any world catastrophe, the economy will recover to a sustainable level.

The big banks may struggle and a few more could go under, but that is how a free market operates. Supply and demand needs to find its own true level without too much government interference. The banks' greed caused the mess and to pander to them now, when they are making higher profits, is folly.

The rest of the economy will support the Fed rate hikes as most corporate profits are up. The next round of results are just a few weeks away and if the results are as good as predicted, the Fed could start a different approach for a few months and see if higher rates and lower home prices can stimulate the economy and bring new jobs. When the fear bubble dissipates, the stock market will be driven by fundamentals which means it will return to making new highs for the year.

People are fickle and their opinions are easily moved. If we think we are doing poorly then we will create poverty. However, if we think we are doing well, then we will progress and do well. So is it time for a change of direction Uncle Ben?

Disclosure: Long TBT