We're stuck in the 'Yes-But' economy where interest rate rises are forever delayed

It’s not just the UK; there are signs that many developed countries are gripped by the “Yes-But” economy. US companies have delivered a much better-than-expected earnings season. Yes, but the stock market reaction has been almost perverse, with the S&P 500 ending the period down. Why? No one knows for sure. But in the “Yes-But” economy good news is often interpreted as bad news because it might hasten rate rises.

Back on this side of the pond, Spain’s borrowing costs are at their lowest levels in history. Which is kind of a good thing – it will buy the country time to sort out its finances. Yes, but it is also a very odd state of affairs, especially when you consider that the country’s debt pile has just tipped the scales at €1 trillion for the first time.

And it isn’t just economies that are giving off mixed signals. Banks are reducing their writedowns on toxic loans. Usually this would be accompanied by rising profits but they’re actually falling. Companies have spent the past few years getting their finances in order and are now sitting on record piles of cash. But they lack the confidence to spend that money and thus return it to the economy, where it will do some good. (True, mergers and acquisitions activity is increasing and that’s usually an indication that animal spirits are returning to the boardroom but so far this year nearly a fifth of all announced deals have been abandoned for one reason or another, suggesting that confidence may be misplaced.) Many global equity markets, bond prices and real estate markets are approaching or have surpassed record highs and are buoying investors’ portfolios. Yes, but there are very worrying indications that bubbles are developing in many asset classes.

So, for every indication that the economy is on the mend, there is another that suggests things could unravel very quickly and this means that for every reason those central bankers congregating in Wyoming can think of to raise interest rates, they will just as surely be able to pick another that gives them a reason to stay their hands just a little longer. Are there signs that interest rates have been kept too low for too long? Oh, yes, but wait: raising them too soon could undo all the good work.

The trouble is that this is all an illusion.

Ambiguous economic signals certainly provide reasons not to raise interest rates but they are also caused by the decision not to raise interest rates. The fragility of the “Yes-But” economy is both maintained and sustained by the unwillingness of central banks to end the biggest monetary experiment in history. This is a profoundly unnatural state of affairs – of course it is producing complicated side-effects.

Janet Yellen, the chair of the US Federal Reserve, recently suggested that the economic recovery is not yet “complete”. That was seen as a sign that the Fed would keep waiting. But, in reality, the recovery can’t be complete until rates rise.

The unprecedented interventions made by the world’s central banks have distorted asset prices and markets. The economies of many developed countries have effectively been on life support for the past five-and-a-half years. Will removing it be dangerous? Yes, but the longer we keep interest rates low, the longer we will be storing up trouble.

A recent survey conducted by The Wall Street Journal found that 30 private economists feared the Fed would wait too long before raising short-term interest rates. Just three were worried that the Fed would move too early.

We need to rip off the plaster. And fast.

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