It is vital that the Fed take this opportunity to move interest rates above zero. New York Fed President Bill Dudley gave a strong justification for rate hikes on May 20: “It would be desirable to get off the zero lower bound in order to regain some monetary policy flexibility.” Kansas City Fed President Esther George expressed urgency on May 29 at a Hoover Institution monetary conference: “I would like to see short-term interest rates move higher in response to improving economic conditions shortly after completion of the taper.”
The policy environment also has improved substantially since 2012, supporting the case for a higher fed-funds rate. The growth in federal spending and debt has slowed. There’s lower risk of U.S. tax rate increases than in 2010-12. And European Central Bank President Mario Draghi provided a forceful defense of the euro in 2011 and 2012, explaining lower bond yields there.
The actual results of the Fed’s 2014 taper have been decidedly constructive—more bank lending, improved growth prospects, reduced uncertainty about the Fed, higher stock prices and still-low bond yields. The latest economic data show that May vehicle sales were the highest since 2007 while business investment, orders and confidence gained. Friday’s employment data showed that the dollar value of payrolls grew at a 6.2% annual rate in March through May, the fastest rate since mid-2006.