06 September 2015

A Fed rate hike won't have adverse results, for now

On September 16-17 the Federal Reserve Board's FOMC will meet to decide on an increase in the Fed Funds rate. It won't be an easy decision to make. Stock markets around the world are in turmoil. Commodity markets have fallen very low. And data on the jobs front are ambiguous. The temptation will be to push a rate hike further down the road or increase it from 0.13% at present to just 0.25%. But my guess is that a rate hike at this point will have little impact.

According to Wikipedia, the Federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. And since inter-bank loans are at a level last seen in 1979, it is unlikely that an increase in the fed funds rate will have much impact. Markets may throw a tantrum but they will probably settle down after a while. A small fed rate hike may even help to slowly deflate the asset bubble that the various bouts of QE helped to inflate.

Even more important, the YoY growth rate of Corrected Money Supply has nearly flattened out in the three months to July 2015, when it was 5.6%. A study of the graph since 1961 shows that at this level no catastrophe has ever occurred.

The trouble is that when the Fed sees a rate hike has little adverse impact it will be emboldened to repeat the process several times. And when that happens calamity usually strikes. The last three recessions have been directly engineered by the Fed. As in previous cycles, the Fed seems unaware that it is raising rates midway through a contraction.

Category: Economics

Philip George
Understanding Keynes to go beyond him

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