No end to monetary uncertainty

The Federal Reserve in the U.S. has kept its target interest rate close to 0% since 2009. Until last summer, it had said it expected to keep them there until 2014.

Then, in September, it extended this period of very low rates at least through mid-2015.

This was a way to manipulate consumer and business expectations by reducing uncertainty: "Please, keep on borrowing and spending the cheap money we're making available. You need not be afraid of rising rates because whatever happens, we guarantee you we won't raise them before that late date."

Whatever one may think of this easy money policy — and I don't believe it's the solution for a sustainable recovery — it created uncertainty as much as it reduced it. What if the economy picks up rapidly before then? And if prices start to rise more than expected? Would the federal bank risk overheating the economy just to keep its promise?

In another attempt to clarify the Federal Reserve's intentions, chairman Ben Bernanke announced last December that it would keep interest rates low as long at unemployment remains above 6.5% and inflation forecast below 2.5%.

Essentially, this means the Fed will continue to encourage borrowing until either the economy or inflation really picks up steam. This may take a long time — or it may not. But the reserve at least assured us it won't let the economy overheat.

Now comes along Janet Yellen, who told us on Feb. 11 that the targets announced in December are only "thresholds for possible action, not triggers that will necessarily prompt an immediate increase" in interest rates. Yellen is vice chair and widely seen as being the frontrunner to succeed Bernanke. In plain English, she essentially tells us that the guidelines for how long to keep monetary policy ultra-loose are meaningless.

Back to square one.

Of course, if the Fed maintains this policy for a longer period, we can expect other central banks, and in particular the Bank of Canada, to follow in its steps, if only to keep a stable exchange rate between our currencies. This would mean more easy money policies in Canada too, and the likelihood that the already high level of consumer debt will get worse. Let alone more bubbles and more distortions in our economy.

We may be officially out of the recession since 2009, but we're not out of the woods yet.

Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal. Il signe ce texte à titre personnel.
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