Why Up When Down?

My father used to say, raising your kids is like flying a kite. When the wind is very strong, then one must give the slack the string needs for it not to break. When the wind dies down, one needs to pull the string tight to the chest so that the kite does not fall down.

I imagine Janet Yellen and the Fed to be in a similar situation with respect to the market.

A few articles I’ve read reflect on why some investors might want the Fed to raise rates. From CNBC,

The flurry of opinions following the Federal Reserve’s decision to hold interest rates near zero at its September meeting has done little to provide clarity on future interest rate policy, market watchers told CNBC on Monday.

In fact, the pronouncements are simply confusing the market, they said.

“I think they’re trying to be transparent — which you can’t argue against transparency — but there is such a thing as an overload of information, and I think that’s what a lot of investors are getting right now,” Robert Luna, Surevest Capital Management CEO, told CNBC’s“Power Lunch” on Monday.

Market watchers got another opinion to mull over on Monday after Chicago Federal Reserve President Charles Evans said in a speech the United States faces inflation and dollar headwinds that may not subside until the middle of next year. He said the Fed could help the country navigate those headwinds by delaying a long-anticipated hike to the benchmark fed funds rate until 2016.

Earlier in the day, New York Fed President William Dudley said the central bank’s policymaking committee would likely raise interest rates this year, perhaps as soon as its next meeting in October. That comment echoed a speech by Fed Chair Janet Yellen last week, during which she said it would likely be appropriate to raise rates sometime this year.

Former Dallas Fed president, Richard Fisher told CNBC’s “Closing Bell”that he would put more weight on Dudley’s comments than those of Charles Evans.

“I pay a lot of attention to President Dudley. I think he reflects more the line of the Board of Governors. It seemed to me that speech indicated [the Fed] are still considering a move in October or December,” Fisher said.

One reason I can think of is that investors might want to see (test?) whether the connection between the Fed’s monetary policies and the market still exist and if so, how strongly.

Of course, there might be a risk that within two years, the Fed might have to lower the rates again. Thus the question is, should the Fed destroy its present credibility and just maintain the current rates so as to preserve future credibility, or restore confidence to the market by raising rates this year knowing that the probability of reversing the policy is not miniscule?

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