Let's revisit the reason the Fed has maintained such ultra-low rates in the first place. In the wake of the Great Global Financial Crisis (GGFC), unemployment soared and the economies around the world contracted, forcing all of the major central banks to take dramatic steps to avoid a global financial system failure. Here at home, the Fed took dramatic steps to prevent another Great Depression. Since their first dramatic move in March 2009 (QE1) The U.S. economy has recovered from its post-crisis downturn, the S&P 500 has more than doubled since the depth of despair but growth remains sluggish in the 1.5-percent to 2.5-percent range with little threat of inflation. Since growth would likely contract to near zero (or below) if the Fed were to normalize rates, I continue to believe that they will proceed with great caution and will continue to maintain a low-rate policy until sometime late 2015 or early 2016.
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"But," you say, "the data are improving!"
Yes, the data are improving slowly and sporadically — exactly what we have all been hoping for and exactly what the Federal Reserve has been expecting. So, if they have been expecting this, why would anyone think that they will now change course just when it is starting to kick in? Janet Yellen has made it clear that the Fed will complete the taper by October, which means $10 billion a month for the next four meetings. She has also maintained that interest rates will remain at artificially low levels until she is sure that the recovery has taken hold and is well rooted. Since the data are not explosive enough yet, she and her "teammates" may continue to debate the pros and cons. But she remains convinced that the data do not suggest that we are in danger of "runaway inflation," a housing bubble, an equity-market bubble or any other bubble for that matter.