Ready for Rapid Economic Growth?
12:00 AM, Mar 22, 2014 • By IRWIN M. STELZER
So much for the Fed, which is attracting almost all of analysts’ attention, largely because what is widely considered Yellen’s press-conference gaffe -- comments ranged from “less than stellar” to “disastrous” -- rattled investors with huge holdings of interest-rate sensitive financial instruments. Ironic, given Yellen’s pride in her role in developing the Fed’s communication policy.
Those who fear a rise in interest rates say that would hurt both bond and equity markets, and not incidentally the recovery. Others argue that such an increase indicates the economy has recovered, and that corporate profits and therefore share prices are certain to rise. As the shill at a carnival or casino barks, “You pays your money and you takes your choice.”
In the end, if we are to move on from “a series of years in which growth has been disappointing”, as Yellen describes the slowest economic recovery in modern memory, to a full recovery, the economy will have to overcome the headwinds that have held it back.
The good news is that the several headwinds are losing force.
· The weather-related drag won’t be repeated.
· Household balance sheets, which were in disrepair when house and share prices hit their lows, are in better shape, at least for some Americans, in part because the Fed’s zero interest rate policy has driven up asset prices.
· The number of underwater mortgages -- those that exceed the value of the owners’ homes -- is down, giving those owners easier access to credit, although credit remains difficult for many consumers and small businessmen to obtain as banks respond to regulators’ pressure by reducing the riskiness of their loan portfolios.
· In February, factory output recorded its largest increase in six months.
· A global recovery seems to be in the making despite problems in China and nervousness created by Vladimir Putin’s decision to opt for peace, a piece of Ukraine as Mel Brooks would put it.
· The recent decline in house sales, real estate agents tell me, is more a result of a lack of inventory than of the admittedly non-trivial effect of higher interest rates and the recent price spurt.
· And 29 of 30 big banks last week passed the regulators’ stress tests with flying colors.
All the pieces are in place for more rapid economic growth, although whether this will translate into more rapid job creation remains to be seen.
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