Federal Reserve and Interest Rates

The most recent Fed policy change was the decision to raise rates by 25 basis points. It is expected that the Fed will raise rates three more times (probably by the same amount) in 2018 and there are roughly 60% odds that the Fed will raise one more time this year (perhaps in December). However, I do not expect this trend to continue, because the debt of the nation is so great that it is simply unserviceable. If rates are raised, the interest owed on the debt will increase and that means more money going just to pay the interest on the loans the country has racked up. At the same time, pension funds and other types of funds are chasing yield in risky markets (the stock market is at an all-time high this year) because they cannot earn enough in interest by purchasing bonds (since rates are so low). As for Dodd-Frank and regulation policy, this is not likely to have much impact on the Fed or constrain it in any way (Lodge, 2011). The real issues are what the Fed intends to do with rates and its balance sheet—that’s what the market cares about.

The Fed attempted to stimulate the economy with its unconventional monetary policy known as QE—quantitative easing—from 2008 to 2013. It has not been alone in this process: other central banks around the world have joined in and are still purchasing bonds to “stimulate” the obviously fragile economies of the world. The BOJ has a balance sheet that represents a deluge should it stop buying and start trying to unwind its portfolio (like the Fed is supposedly going to do). The ECB is another one that is still buying bonds and driving interest rates down. In doing so, these banks are propping up the stock markets but they are hurting savers and funds that require substantial returns on their investments (a ludicrously high 5%--by today’s standards—in most cases, which is why so many pension funds in states across the U.S. are warning of collapse and warning retirees not to expect their state governments to be able to make good on the promises they were given when they were employed).

In other words the Fed is trapped: if it doesn’t raise rates and start unwinding its balance sheet, it must admit that we are living in a zombie-economy that is controlled by the central banks—i.e., it is the end of the free market (in reality, it is already over: the Fed has simply been stalling the inevitable—too much easy credit has flooded the system, causing inflation, while wages have stagnated). Pension funds need higher rates so that they can obtain a better return with a risk-off portfolio. Yet, if one is a debtor, higher rates will likely lead to more defaults, which will cause the dominoes to fall, as the global economy is such a Ponzi-like scheme today. Unless the central banks are anticipating some kind of debt jubilee in the future, none of their actions make any sense in recent years. Of course, there is the fact that we have witnessed the greatest transfer of wealth over this same period from the 99% to the 1%, but if one were to allege that this was the real aim of the Fed, one could be accused of having no confidence in the state’s highest of high institutions.

Over the next two years, I think the Fed will try to continue to raise rates, but at a very slow pace so that the market does not react too violently. It will do this without too much fear, I think, because the other CB’s are still backstopping the global marketplace. The Swiss National Bank is still buying hand over fist, and the BOJ can’t stop buying. Draghi has promised everything but the kitchen sink to ensure that markets don’t fall—but other factors exist that will weigh on the marketplace in the coming years: factors that may be beyond the control of the Fed and the other CB’s—such as inflation (even though the Fed refuses to acknowledge it), war, and destabilization of society (and thus of industry and investment). Deregulation may have allowed the banks to play fast and loose (Nader, 2002)—but the fact is the Fed has had sovereignty since 1913, when the U.S. gave it the power to print and lend at interest to the government—when prior to this it had always been recognized as a natural right of kings to coin their own currency.

References
Lodge, M. (September, 2011). The good, the bad and the uncertain of the Dodd-Frank.
Bank Investment Consultant 19 (9) p. 19
Nader, R. (2002, July 26). The musty dark corners of bank regulation. The Voice News,
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