The financial world is watching the Federal Reserve as it prepares to hike interest rates for the first time since June 2006.
Higher rates is another way of saying less monetary stimulus, which the Fed has been providing in its efforts to stoke growth since the financial crisis. In theory higher rates also leads to slower growth, a stronger dollar, and less inflation.
Societe Generale’s Albert Edwards, a vocal market bear and critic of the Fed, has been warning of the perils of deflation for years. Deflation means falling prices, and when prices fall businesses and consumers delay spending causing prices to spiral further and economic activity to grind to a halt.
So it comes as a surprise that a deflation fearmonger would endorse a rate hike.
“The clamour for the Fed not to enact the long-awaited 1⁄4% rate hike next week is growing by the day,” Edwards wrote in a note to clients on Thursday. “Misgivings come not just from reputable mainstream commentators, but now also the World Bank has repeated the IMF’s recent words of caution in advising delay. What a load of nonsense!”
In recent weeks, more and more experts have been calling for a delay to rate hikes given the heightened volatility in the markets.
For Edwards, there’s one thing that’s scarier than inflation: an even bigger credit-fuelled economic bubble.
After all, Edwards is one of the many experts who argue that loose monetary policies helped inflate the credit bubble that led to the financial crisis, which has left us with deflationary pressures around the world.
“[E]ven those like me who see a deflationary bust awaiting think the Fed should hike next week — because the longer you leave it, the bigger the financial market excesses become, and the bigger the risk of financial dislocation and global recession ensuing,” Edwards wrote. “Have we learned nothing from the 2008 Great Recession? Just get on with it!”
The consensus seems to acknowledge that tighter monetary policy via rate hikes would come with economic pain. However, delaying rate hikes also comes with risks. And for Edwards, the risk that we repeat what caused the financial crisis is on the rise.