Martin Feldstein vs./ Fed Chairman Powell and Irving Fisher

In a November 27Wall Street Journal article,“Raise Rates Today to Fight a Recession Tomorrow,” Martin Feldstein reminded us he has been repeatedly cheerleading since 2013 for the Fed to raise interest rates faster and higher “to prevent the overvaluation of assets” whose prices “will collapse when long-term interest rates rise.” Icritiqued one of Feldstein ’s similar articles in 2017.November 27 was an odd time to be fretting about overvaluation. The day before Mr. Feldstein ’s article appeared, a headline in the same newspaper – “Stocks, Bonds Face Year in Red” – observed that “stocks, bonds and commodities are staging a rare simultaneous retreat” Yet Feldstein urged the Fed to keep pushing short-term rates higher (3.4% “will not be high enough”) to somehow ease the pain of a supposedly inevitable increase in long-term interest rates (even if inflation stays near 2%), and to also make it easier to lower short-term rates in response to some future recession, a recession probably caused by the Fed raising rates t oo much (see graph).Mr. Feldstein defined “overvalued assets” in terms of historical averages. “The price-earnings ratio is nearly 40% above its long-term average,” he warned. But that is because long-term interest rates are more than 50%below their long-term average. The yield on 10-year Treasury bonds averaged 6.5% since 1970, ranging from 1.8% in 2012 to 13.9% in 1981.  The p/e ratio almost always moves higher when long-ter...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs