Tag Archives: interest rates

(Revised) The Housing Bubble: Fannie and Freddie

The system involving Fannie Mae and Freddie Mac needs to be reformed. According to the Wall Street Journal, “Many in Washington say they want to get rid of the [Fannie and Freddie], but they want to preserve many of the benefits that those companies enabled – namely, providing a steady source of relatively chap 30-year, fixed-rate mortgages”. Fannie and Freddie do not make loans, but package mortgages into securities that are sold to investors. As mortgage guarantors, Fannie and Freddie promise to pay investors back when the loans default. On the one hand, Fannie and Freddie serve an important role as middlemen bringing buyers and sellers together. On the other hand, Fannie and Freddie stick the government with a huge bill when loans default.

The government played a critical role in the housing bubble. Burton Malkiel writes in A Random Walk Down Wall Street, “The government itself played an active role in inflating the housing bubble. Under pressure by Congress to make mortgage loans easily available, the Federal Housing Administration was directed to guarantee the mortgages of low-income borrowers”. The government vehicle that guaranteed these loans was Fannie and Freddie. Creating a classic moral hazard problem, the government takes on a majority (if not all) of the risk. As a result, lenders loosened their standards and provided loans to noncredit worthy individuals because the government was there to assume the risk. Although there are many other factors that contributed to the housing bubble, an important factor was government policies that encouraged lenders to lower their standards.

After the initial increase in demand caused by low-income borrowers entering the market, the housing bubble continued to grow in size due to a positive feedback loop. According to Malkiel, “The initial rise in prices encouraged even more buyers. Buying houses or apartments appeared to be risk free as house prices appeared consistently to go up. And some buyers made their purchases with the objective not of finding a place to live but rather of quickly selling (flipping) the house to some future buyer at a higher price”. Speculators, who purchased real estate with the intention of selling for a profit, contributed to strong demand and further pushed prices upwards. The implicit government guarantee essentially eliminated credit risk for investors, which is the risk of default. The belief that prices will continue to rise created “castles in the air”.

As it always does, the bubble finally popped. Interest rates, which were low in the years prior to the financial crisis, began to rise (i.e. interest rate risk). Demand for houses slowed down and prices fell. Mortgages grew to exceed the value of the underlying asset (i.e. the house or apartment). As a result, homeowners chose to default and allow the lender to repossess the asset. The increase in the supply of homes caused prices to fall drastically. The burst of the housing bubble brought on the recent financial crisis in which Fannie and Freddie defaulted. In September 2008, the government bailed out Fannie and Freddie.

Fannie and Freddie caused many problems as quasi-public institutions. According to the Wall Street Journal,

In addition to serving as mortgage guarantors, the firms also amassed over the last two decades huge investment portfolios, which helped them generate larger returns to appease shareholders. The companies claimed that these portfolios helped reduce borrowing costs for homeowners, but critics argued that they simply used their implied government guarantee to profit between the spread on those investments and the cheaper debt-funding costs”.

Using the implicit government guarantee to benefit in the market place is a misuse of power. Fannie and Freddie are a duopoly, which were able to reap huge profits before being bailed out. Currently, lawmakers are working on a new system in which the good aspects of Fannie and Freddie would be preserved. According to the Wall Street Journal, “The plan, by Senate Banking Committee leaders Tim Johnson (D.,S.D) and Mike Crapo (R., Idaho), calls for replacing Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered”. Forcing private insurers to face losses would hopefully discourage irrational risk taking by decreasing moral hazard. Although there is uncertainty surrounding the future of Fannie and Freddie, the need for change is clear and there are certain agreed upon principles – make the “implied” guarantee explicit, get rid of those investment portfolios, require more capital and tighter regulation.

The real questions is whether Fannie and Freddie will remain (in a reformed system) or will be replaced. If replaced, then who will be the successors? I believe this is a very tough question to answer. Although big banks could easily handle this role, this would intensify concerns about certain institutions being too-big-to-fail. I look forward to hearing more about the Senate Banking Committee’s plan.

Do Lower Interest Rates Lead to Irrational Investment?

Noah Smith has a piece today in which he discusses what he calls the “Finance Macro Canon,” basically a set of beliefs held by financial economists today. One of the beliefs strikes me as particularly intriguing:

5. QE depresses interest rates, encouraging investors to “reach for yield” by investing in risky assets, increasing the likelihood of another financial crisis.

Many economists are concerned by this attitude because they believe that interest rates need to remain low right now (see Paul Krugman’s New York Time’s piece for his take on the issue). But is there a good reason to believe this part of the financial economics canon?

The first thing we need to do is figure out why such a statement matters. After all, traditional monetary economics models will show that a fall in interest rates caused by an increase in the money supply will generally lead to more investment, and that this is rational on the part of the investors. So it is not surprising or even bad that lower interest rates lead to greater investment. What the financial economists worry about, I think, is that at low interest rates people invest more than is rational, taking on, as Noah suggests, especially risky assets.

But we need to be  clear that if we want to claim that at low interest rates people become less rational, we need a whole new economic model with a behavioral component built in. Indeed, the traditional models do not allow for the kinds of claims that these financial economists make; explaining why such a statement is true requires a whole new paradigm, as far as I know.

That is not to say that the claims are false. Indeed, they could  very well be true — would it really be all that surprising to discover that when people see something cheap, like investment dollars with a low interest rate, they might get excited to the point that they invest more than they should? I’m not saying that this is true, just that it wouldn’t be surprising, and it is not a claim that we should reject simply because it does not fit in with rational models.

Still, the financial economists need to be able to explain this, ideally with a model, but some data would do. I did a quick Google search to try to find some research backing up the claim, but couldn’t find any. If any of you readers out there know of any support for the idea that low interest rates lead to over-investment, please leave a comment with the link!

(Revised) Time to Buy

Anyone with a basic understanding of the economy knows that now is a good time to buy a house. Mainly because interest rates and prices are low – and rising. The longer people wait, the more they will have to pay for their home, and with higher interest rates on mortgage payments. But there is a clear challenge for home-buyers right now: Wall Street investors looking to “Flip This House”. Big businesses are also taking advantage of low housing prices – and are capitalizing on their investments by buying cheap homes, renovating them, and selling them at a higher price.

This isn’t bad for anyone, really, except for unlucky home buyers that are caught in bidding wars with these investors. On one side, the seller gets to sell his property, the buyer makes a profit from “flipping” the house, and surrounding home-prices consequently rise as the standard for homes in the area increases. However, for average home buyers caught in a bidding war with big investors, it is pretty much a lose-lose as they stand no chance against their bidding capacity. Considering their hefty wallets, it is best for home buyers to simply back-off. So the competition to find houses is no longer a matter of outbidding someone else looking for a home – it’s now a matter of hoping that no big investors (who pay mostly in cash) notice your future-house. Despite this challenge to home buyers, though, now is still the time to buy.

In 2012, big investors bought about 140,000 houses in the United States (3% of sales). But this small percentage obscures the real impact on individual markets. For example, in July of 2012 corporate buyers accounted for 25% of house purchases in Atlanta, and 20% in Tampa. Though they are not investing all over the country, their concentration in real estate-desirable locations has a large impact in those particular areas. Other areas of concentration include Florida, Phoenix, Las Vegas and California’s Central Valley. Not only are these investors making it more difficult for home buyers, but they are also slowly driving up home prices.

Of course, this is something the economy wants. So comes in the need to purchase homes now.  A report from the National Association of Realtors shows that 5.1 million houses were sold in 2013, a 9.2% increase from 2012 and a 20% increase from 2011. In 2013, the median price of a house sold was $197,100 – an 11.4% increase from 2012. Increasing prices, lower unemployment, a decrease in foreclosures, an increase in demand, and low mortgage rates (though rising), have fueled the growth in the housing market.

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The Home Price Index of the Federal Housing Finance Agency shows a 14% increase in home prices from 2012 to 2013. Though this is an excellent sign for the economy, it is a call-to-action for home-buyers. And not only because of prices: today’s 30-year fixed mortgage rates are far cheaper than they have been in 40 of the past 42 years (at 4.57% last week). But again, this rate is more than a percentage point higher than in January – mortgage rates are on the rise.

Thus, as we look at the recovering economy with positivity, we also see its impact on home-buyers. Although corporate investors are making it more difficult for some in real estate, there is no doubt that now is the time to buy.

The Housing Bubble: Fannie and Freddie

The government, particularly Fannie Mae, played a critical role in the housing crisis. Leading up to the financial crisis, Fannie Mae purchased a colossal amount of mortgage-backed securities (MBS) from Wall Street. Although the MBS originated from Wall Street’s investment bankers, the underlying mortgages came from lenders that provided the loan directly to the consumer. The lenders are responsible for assessing the creditworthiness of the consumer. Burton Malkiel writes in A Random Walk Down Wall Street, “The government itself played an active role in inflating the housing bubble. Under pressure by Congress to make mortgage loans easily available, the Federal Housing Administration was directed to guarantee the mortgages of low-income borrowers”. The government vehicle that guaranteed these loans was Fannie Mae, which assumed all the risk when it purchased the MBS. The government taking all the risk creates a classic moral hazard problem for Wall Street as well as the lenders. The lenders loosened their standards knowing that Wall Street would buy the mortgages (securitize them) and sell them to Fannie Mae. In short, the housing bubble can be traced to lenders that loosened their standards due to the government’s policies.

The housing bubble grew massive as demand pushed up prices. Low interest rates allowed an enormous amount of credit expansion, which supported the increase in demand. The increase in demand and rise in prices began to resemble a positive feedback loop. According to Malkiel, “The initial rise in prices encouraged even more buyers. Buying houses or apartments appeared to be risk free as house prices appeared consistently to go up. And some buyers made their purchases with the objective not of finding a place to live but rather of quickly selling (flipping) the house to some future buyer at a higher price”. The introduction of speculators who purchased real estate with the intention of selling for a profit is a classic sign of a bubble. Eventually the bubble popped (as it always does). In this case, mortgages grew to exceed the value of the underlying asset (i.e. the house or apartment). As a result, homeowners chose to default and allow the lender to repossess the house. The increase in the supply of homes caused prices to fall dramatically. The collapse in prices and burst of the housing bubble was, for lack of a better word, devastating.

Following the government bailout of Fannie and Freddie, I believe the need for reform is clear and the basis for the reform should include removing the implicit government guarantee. According to the Wall Street Journal, “Two key lawmakers on Tuesday said that they would soon propose legislation to eliminate the housing-finance giants. Highflying shares of Fannie and Freddie dropped sharply; Fannie lost nearly a third of its value”. As long as the government institutions such as Fannie and Freddie take on all the risk, moral hazard is going to distort financial markets. Fannie and Freddie, which are part pubic and part private, do not make any sense to me because of the looming perception that the government will not allow it to fail.

Fortunately, lawmakers are devising an alternative that would remove Fannie and Freddie from the picture. According to the Wall Street Journal, “The plan, by Senate Banking Committee leaders Tim Johnson (D.,S.D) and Mike Crapo (R., Idaho), calls for replacing Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered”. I think this might be a good plan because moral hazard would be decreased. Forcing private insurers to face losses should discourage dangerous risk taking, which would eliminate the implicit promise of government backing and decrease moral hazard.

Indonesia: The Comeback Kid

About a year and a half ago, Indonesia was considered one of the most flourishing emerging markets. Equipped with a manufacturing industry experiencing massive growth and boasting the title of the largest economy in South East Asia, Indonesia looked like a sure-fire bet for investors looking to invest abroad. Unfortunately, however, Indonesia’s investment potential suffered greatly in the summer of 2013 when speculation of the Fed’s QE tapering caused rich-world investors to pull back on some of their foreign investments. Once the Fed went through with the taper in late January, emerging markets were hit even harder. EM currencies plummeted and many countries were forced to jack up interest rates tremendously in order to keep investors from pulling their money out.

As we reach the end of the first quarter of 2014, most EM’s are still suffering from the effects of tapering, but as a recent article in The Economist, “Fragile No More,” points out, Indonesia is making a comeback:

Indonesia’s rupiah has rallied by 3.3% against the dollar—the most among major emerging-market currencies. Jakarta’s main stock market is trading close to four-month highs. And foreign funds have bought $1 billion more local bonds and shares this year than they have sold.

So why is Indonesia beginning to show signs of its past luster, while other EM’s still sit in the dark? It’s because Indonesia fell early in the game. Last summer’s EM sell off combined with a widening current-account deficit, forced Indonesia to let its currency float, which caused a 14% depreciation in the rupiah from May 2013 to now. Letting the forces of economics do their work, the Indonesian central bank watched as its weak currency attracted demand for Indonesian exports abroad, leading to a $4 billion decrease in the deficit. One step backward, two steps forward, as they say.

Because of its popularity, Indonesia suffered the brunt of the EM sell off in the very beginning, giving recovery measures more time take effect. Furthermore, more time allowed Indonesia to increase its interest rates slowly:

Other central banks waited too long to respond to market turmoil and then overreacted. Turkey raised rates by 5.5 percentage points in a single day, hoping to cow traders into laying down arms. Bank Indonesia had raised rates earlier, by contrast, and more gradually: enough to cool domestic demand but not enough to touch off a recession. The combination of higher rates and a cheaper currency nurtured a rebalancing.

Indonesia provides an intriguing case study for the effectiveness of traditional monetary policy in recovering from foreign investment outflow. My prediction is that other emerging markets will follow in Indonesia’s footsteps, opting to pursue more gradual policy changes in order to stabilize and revitalize their economies.

QE May Be America’s Friend, but It’s Not Mine

After the Great Recession, the Fed began the use of Quantitative Easing (QE) in an attempt to put the economy back on track.  With short-term interest rates already near zero, the Fed began purchasing unconventional, longer-term assets in order to bring down long-term interest rates.  And much of the world followed suit.  Since the Great Recession, the Federal Reserve, ECB, Bank of England, and Bank of Japan have injected more than $4 trillion of additional liquidity into the world economy.  Looking at the results of this “easy money” policy, QE seems to have been beneficial.  Indeed, more QE, coupled with the elimination of the Zero-Lower-Bound, would likely have made America’s long economic recovery much faster and much less painful.

According to a study by McKinsey, low interest rates brought about by QE have saved the federal governments of the USA and European countries over $1.6 trillion since 2007.  This savings on debt-interest payments has allowed governments to achieve higher levels of spending and reduced levels of economic austerity (at least in some places).  The private sector has also benefited, with non-financial corporations saving over $700 billion in interest payments in the last five years.  This savings has helped boost profits for US corporations over 5% in a time when the economy was struggling, helping to contribute to a reduced unemployment rate (even though this recovery has been very slow and painful).

Nevertheless, as is commonplace in economics, what benefits the greater economy does not usually benefit individuals.  Take a recession, for example.  During an economic downturn, individuals benefit from increased savings.  Increased savings allows individuals to tolerate a slump better, ensuring adequate income at a time of economic uncertainty.  Increased savings, however, is bad for the economy.  The aggregate economy requires increased levels of spending to boost aggregate demand and help pull the economy out of its slump.  In this way, we can see that the micro-level and macro-level goals do not necessarily align in economics.

Unfortunately, this goal divergence applies to QE as well.  I have already pointed out that QE greatly benefited the aggregate economy by lowering interest rates and making it easier for governments and corporations to spend.  For individuals, however, these low interest rates have had a devastating effect.  Most notably, low interest rates have wreaked havoc on the cash flows of retired, fixed-income investors.  Indeed, household in the USA and EU have lost over $600 billion in net interest income since the introduction of QE.  For those in retirement relying on cash payments from interest-bearing assets, this typically means a reduction in income and a reduced quality of retirement.

In this way, it seems that QE has benefited the aggregate economy at the expense of individuals.  It is true that those relying on increased wages have benefited from QE as unemployment falls.  But more senior individuals, who rely on fixed-income assets as their main source of cash, have greatly suffered from lower interest rates.  I do not mean to say that QE is a bad policy.  Indeed, I believe QE, like negative interest rates, is a necessary policy to help control our bleeding economy’s pain.  But the effect of QE on individuals points out that in economics, there is rarely a win-win situation.  Whether it is QE, taxation, subsidies, trade barriers, or any other type of economic policy, there is almost always a loser.

Brazilian Interest Rate Policy

With the Fed beginning to taper its Quantitative Easing program, the focus has begun to shift to what this means for emerging market economies that had become havens for return seeking investors.  Fed tapering means that the Fed sees the US economy as relatively stable now which would mean higher interest rates in the future.  This is causing a huge drain of investment and capital from emerging markets as it returns to the relatively safer returns of the US.  One of the biggest opponents of US Feds policy has been Brazil.  When the Fed announced that it would be cutting its bond buying program by $10 billion, the Brazilian Real fell to its lowest levels in five years.  The Brazilian central bank has responded by increasing interest rates to 10.5% in hopes of retaining foreign capital and investments.  Brazil has seen an increase in interest rates of 3.25% over the last 10 weeks.  The Finance Minister of Brazil defended the Real three weeks ago, stating that Brazil’s solid fiscal situation, floating exchange rate, record high international reserves and stable financial situation would protect them.  Unfortunately, this has not been the case.

Inflation is still above the target rate of 2.5% and barely below the upper limit target of 6.5%.  While inflation has come down since its 2 year high in June, the Real has dropped 15.3%, causing Brazilian imports to become more expensive.  The growth target for Brazil has now been cut to 1.67%, down from 3.8%.  The cause is due to mismanagement of Brazil’s interest rate by its central bank.

In the lexicon of the late Nobel Prize-winning economist Milton Friedman, Brazil is mimicking the “fool in the shower.” Friedman drew an analogy between the policy maker who aggressively changes rates to someone who finds the water in the shower too cold and impatiently overcompensates by making it scalding hot. Tombini has been carrying out one of the world’s most aggressive increases since April to curb inflation after he cut rates to a record low 7.25 percent in a bid to stoke growth.

According to a recent Wall Street Journal article though, Brazil isn’t in a position to continue to increase its interest rates.  The higher interest rates are inhibiting growth and Brazil’s economy is not strong enough to maintain the growth rate.  The fact that inflation is still high is another problem that the central bank is going to have trouble combating if it lowers interest rates.  Analysts believe that Brazil’s central bank has given up on its 4.5% target rate and are just focused on keeping inflation below the upper threshold of 6.5%.  Brazil’s response to this has been for the government to cut spending by a proposed $18 billion in order to help the central bank’s monetary policy be more effective and to fight inflation.  It will be interesting to see what the effect of Brazil’s interest rate policy in the future since most interest rate adjustments take about 6 months to realize the effects on the economy.

College Loan Industry

Paying for college is no easy thing today with the average tuition costing anywhere from about $9,000 for public instate universities up to $30,000 for private universities. A year that is. With the recession in 2009, many college graduates found themselves graduating without working and facing down hefty loans with no real income. Since then the economy has recovered and the private banking sector is regaining faith in students to pay off their loans. So will it be easy for just anyone to get their loan and head to college?

Probably not. Although the private sector has started showing signs of faith, it is likely that for now they will be lending to students who have good credit and a prosperous cosigner. A high school graduate with good credit and a cosigner can find a loan with interest ranging from 2-5.5% depending on some of the variables. If you don’t have good credit and a good cosigner you wont be finding yourself as lucky. People who fall into the later category typically find college loans with interest rates higher than 10%, an amount that makes any interest hard to pay off. Not only are they slammed with a high interest rate but they are usually limited to finding federal loans oppose to the loans from private banks.

As one may have guessed the students who are taking out federal loans at higher interest rates are finding themselves defaulting at a much higher rate. When the recession hit in 2009 student defaults spiked from about 4% in 2008 up to 10% in 2009. Facing major loses the private banks had to tighten down restrictions to avoid extreme losses. On the other side, Federal loans only increased from 7% in 2008 to 9% in 2009. The major difference between the private bank loans and Federal loans is in the recovery. Due to stricter underwriting the private sector has been able to avoid loses and drop its default rate all the way down to 3%. The Federal loans, however, kept restrictions broad not trying to limit college ambitions and as a result have seen increases in default rate from 9% during the recession to over 11%.

Don’t get me wrong, the news of improved loans for college students is a good indicator that our economy is on path to full recovery, it just isn’t great news for students across all socio-economic statuses. Some students are going to face some hard times when applying for these loans and then attempting to pay the off post graduation. We can only hope that with the improved economy more students are able to get high paying jobs upon graduation and can pay off these monstrous debts.

Thankful for Doves

The Federal Reserve transcripts from the financial crisis were recently made public. According to the Wall Street Journal, “They provide the most complete view yet into developments inside the nation’s central bank as the financial crisis worsened and threatened to plunge the U.S. into another Great Depression”. I am fascinated by this opportunity to gain a glimpse into the thought process of the Fed during such a turbulent time period. In addition to eight formal policy meetings, there were also six emergency policy meetings in 2008. Ac lose reading of these transcripts provides valuable insight into monetary policy decisions and the discussion among central bankers.

In January, Fed cut rates twice in effort to stave off crisis. According to the Wall Street Journal, “Officials acted boldly in January 2008, but spent much of the spring and summer hamstrung by uncertainty, disagreement and an unexpected inflation jump”. On January 22nd, the Fed announced a Fed funds target cut by 75 basis points to 3.5% and only eight days later reduced the target rate by 50 basis points to 3%. Although the Fed hoped these reductions would be sufficient in getting out ahead of declining markets, history shows that the Fed could have cut interest rates even further.

In March, Fed acknowledged increasing probability of a recession and the New York Fed announced it would provide $29 billion in financing for JPMorgan Chase to acquire Bear Stearns. According to the Wall Street Journal, “Exchanges between officials got occasionally testy, especially after Mr. Bernanke’s decision to help J.P. Morgan Chase & Co. finance the rescue buyout of Bear Stearns in mid-March”. Fed officials opposed to easy-money policies, also known as hawks, did not agree with all of these policy decisions. Although I respect the noble cause of hawks to prevent inflation, inflation is more likely to occur during a boom than during a recession. From the perspective of a hawk, low interest rates combined with additional Fed liquidity spells inflation. However, this really only means a larger money supply and this will not cause inflation unless households and businesses are spending.

Mr. Bernanke, who might be considered more dovish, did not hide his disagreement with the hawks. According to the Wall Street Journal, “In June, Mr. Bernanke gently chastised Mr. Fisher for voting against a decision to keep interest rates steady in the face of rising inflation. The Fed acknowledged in its statement it was alert to financial risks, as Mr. Fisher wanted, but he also wanted a rate hike”.  The spike in inflation seemed to validate the concerns of the hawks. As a result, some hawks such as Mr. Fisher became concerned and hoped to see an increase in interest rates. The increase in the price level could have been for a number of reasons such as increasing commodity prices. I am happy that Mr. Bernanke stood his ground because an interest rate hike would have likely caused a disaster.

In July, the Fed made other decisions and left rates unchanged. According to the Wall Street Journal, “The Fed held an unscheduled meeting on July 24 to discuss and modify some of its emergency lending facilities in a bid to help provide additional liquidity to markets”. Although it is easy to criticize certain decisions in retrospect, the Fed should have cut rates lower and sooner in 2008. I believe this was because the Fed did fully comprehend the amount of leverage in the economy and the complexity of certain financial instruments (i.e. mortgage-backed-securities and credit default swaps). Finally, the Fed established a target range for the Fed funds rate of 0-0.25% on December 16th. In hindsight (which is always 20/20) the Fed should have arrived at the zero lower bound sooner. Due to the inability to implement negative interest rates caused by zero lower bound, the best way for the Fed to handle a devastating recession is to cut interest rates to zero very quickly.

The decision to alter interest rates is challenging to the many different impacts it has, however, it seems to me that there was significant hesitation at the Fed while lowering rates. Although there are moments when rates need to be high to cool down booming economy, there are also moments when rates need to be low (theoretically negative, but in reality zero) to aid a weakening economy. In conclusion, there is a time and a place for everything.

Time to start saving again?

As all Economics 411 students should know by now, quantitative easing – or balance sheet monetary policy – won’t come back to haunt us in any scenario until the economy starts to heat back up. In that case, only by the Fed missing the signs of an economic rebound and failing to act would the U.S. economy be at risk of overheating. Professor Kimball defends this aspect of QE in many of his posts, but here is one that describes this scenario in more detail than I will go into on this post. In today’s Fed policy meeting, it became clear that some officials are already talking of dumping off assets accumulated through QE in the near future. Selling off these assets would mark an attempt to start bringing up the Federal Funds Rate and other short-term interest rates. Fed “Hawks” brought up the dangers of inflation as the tapering continues and is expected to end in Q4 of 2014.

Is it too early to talk about a boon, and of increasing rates that for years have been stuck near the zero lower bound? I don’t think so. With a strategy as new as QE, it seems that caution is much better than the alternative. And really, how far is the U.S. economy from finally ending talk of recession? As Fed chairwoman Janet Yellen has said, the jobless rate target will remain at 6.5% for the foreseeable future. But how far off is that? Recent news confirms that a strong recent push has brought America down to just a 6.6% unemployment rate. That’s exactly why planning ahead – even to something so foreign to us as inflation has been for the last few years – is imperative for the Fed, and now.

“‘We are a lot closer to a normal economy than we’ve been in a long time,’ James Bullard, president of the Federal Reserve Bank of St. Louis, said Wednesday in an interview. He sees the jobless rate hitting 6% by the end of the year, which he said could put pressure on officials to start considering rate increases.” -WSJ

While Mr. Bullard’s forecast of 6% seems to be an answer to our economic prayers, there is still a collective worry about the effects that dropping out altogether from the labor force have had. Some believe that while 6.5% sounds great, it is a long shot from the actual state of the U.S. economy at this point. And it’s only fair to assume we have a way to go, especially before the general population is convinced that the recession has passed. Most estimates have interest rates rising by late 2015 at the earliest, as inflation stands well below anything worrisome. It seems like a problem the U.S. economy won’t need to face for a while, but the inflation “Hawks” are starting to circle at the Fed.