Lawrence Lindsey: “We’re delaying a normalization of rates way, way beyond what is prudent. We have a monetary policy that’s now in place that was adopted for the crisis conditions of 2008 and 2009. This summer we’re going to be getting the seventh year of this recovery. It’s been a lousy recovery, but it’s still the seventh year of a recovery.
That is totally inappropriate. The unemployment rate is essentially at what economists call “NAIRU” [Non-Accelerating Inflation Rate of Unemployment]… When I went to school, you’d be laughed out of the classroom if you said the right interest rate when unemployment rate was five four [5.4%] was zero - it was just the most preposterous thing you could imagine. Or that the Fed should have quintupled its balance sheet in five years.
We’re at the point of absurdity. Maybe it made sense when you had a crisis. It does not make sense now. At some point what is going to happen - and this gets to my eight or nine cataclysmic number [on a scale of 1 to 10] - is that we’re going to get a series of bad numbers - a little higher inflation, higher average hourly earnings or whatever - and the market is suddenly going to say, “Oh my God, they are so far behind the curve that they will never catch up.” And the market is going to force an adjustment on the Fed that will be wrenching. That’s the cataclysmic outcome. If the Fed were to get a little bit ahead of the curve - or even maybe move a little bit closer to the curve - that’s the best we can hope for - we would mitigate that. We would phase into it gradually. And that’s why so much is at stake in the monetary policy that we adopt now…
“I used to think more highly of what they were going to do. And I’ve constantly been disappointed. So I certainly think they could mitigate it if we do very modest things now. I think the Fed will say, “Oh, we’re really serious.” When I talk to my clients, the Fed has almost no credibility when it comes to a sense that they will be able to stay on top of this ticking monetary bomb.
Now, my clients are all making money. They are enjoying the party while it lasts. Nobody is complaining. That’s why things [the stock market] are going up. But they also know it will end. They don’t think the Fed is going to take it seriously. And so if you have an institution that’s lost credibility in the market, when the bad number comes in the market is going to take the Fed and the Treasury curve to task in a very painful way.”