The Federal Reserve’s taper is the right move for the economy and eventually the markets. It moves capital away from the well-connected and towards those who need it most, small businesses. The big dogs on Wall Street, the well-connected, don’t like it. What a surprise as David Malpass writes in his WSJ editorial:
The evolution in Fed policy may be enough to finally break the economy out of slow growth. The magnitudes are certainly large enough to move the needle. On the current tapering path, the Fed will cut its new bank borrowing in half to $500 billion in 2014 and $0 in 2015.
The positive economic and market reaction to the taper may also give the Fed the confidence it needs to normalize interest rates. This would restart the market-based allocation of capital across the economy, relieving the de facto rationing of credit that has weighed so heavily on growth since 2009.
In a Tuesday news conference, China announced its own interest-rate liberalization. It stated the express purpose—to put money in the pockets of ordinary savers and direct lending to privately owned firms.
Those are worthy goals for U.S. policy. Economics is murky in many areas, but the evidence is clear that price controls (including the Fed’s near-zero interest rate policy) damage markets and force a harmful rationing of resources that hurts living standards.
Wall Street will object loudly to normalization as it did to the taper because it is making huge profits from Fed policy. But gradually higher interest rates will let the return for savers and investors rise, making more loans available for smaller borrowers and boosting jobs and business investment.