When do we take the training wheels off?

As an uncoordinated kid, training wheels were a great comfort while learning to ride a bike. 

I became upset anytime my dad suggested their removal.

Finally, he forced me to take them off. 

He placed his hand on my back to help my balance. 

In his wisdom, as I rode, he slowly removed his hand from my back.

To my amazement I was riding all by myself.

Global markets have a similar relationship with the easy money policies initiated to fight the credit crisis.

As confidence in the global financial system declined from 2007-2009, the Federal Reserve decreased interest rates in order to increase economic activity, leading to 10 years of global economic expansion.

It is well within monetary policy orthodoxy to decrease interest rates during a credit crisis.

But a decade later, it is as if I was still using training wheels as a teenager.

In Q4 2018, when Federal Reserve Chairman Jerome Powell hinted that it was time for rates to rise, the S&P 500 dropped nearly 20 percent.   

The rally that has since followed (and more recently, reversed) occurred after Chairman Powell indicated the Fed would be patient with regards to raising interest rates.

But there are problems with Chairman Powell’s patience. 

As interest rates remained low, investors increased their exposure to risk assets, pushing prices to high levels that could quickly reverse.

Additionally, the low interest rates that we used as a tool to fight the last credit crisis will be difficult to employ successfully in the next recession. Interest rates are already are close to zero. If we find ourselves unable to fight the next recession, we could prolong our recovery period.

At some point, the training wheels will have to be removed.  

We better have a Band-Aid ready.