Sunday, November 16, 2014

When Will the Fed Start to Raise Interest Rates?

I'm with Alan Greenspan on this (via WSJ)
He said the Fed may not even have that much power over the timing of interest-rate increases. The problem as he sees it is an interest rate the Fed pays on the money banks park at the central bank, called reserves. Fed officials plan to use this tool as their primary lever for raising interest rates when the time comes. If bankers decide to put this money to work, creating inflation risks, the Fed may be forced to raise rates, even if the economy isn't ready for it, he warned.

“I think that real pressure is going to occur not by the initiation by the Federal Reserve, but by the markets themselves,” Mr. Greenspan he said.


  1. The Fed will taper in about six months from whenever you ask the question.

  2. They are not going to raise rates, not for years. You have a roadmap for what they will do. It's called Japan and its not much of a mystery.

    1. Brian, absent economic reality, the Fed would keep rates at zero indefinitely. Eventually, markets will prevail. They'll either acknowledge they've lost control, raise rates, and take their lumps, or they'll destroy the dollar.

      The choice is stark: allow rates to rise and watch this phony economy implode, or print the dollar into oblivion and watch the economy implode.

      What I fear is that the Fed won't recognize when the music has stopped. Their track record hasn't exactly been stellar when it comes to sensing economic bubbles popping.

  3. Financial Sphere Bubbles

    If globalized finance dominated by policy “activism” and distortions wasn’t enough, the Global Financial Sphere Bubble became only further divorced from real economies. And it is here that I believe future historians will see the catastrophic flaw in Bernanke’s policy doctrine: the belief that “money” printing and zero rates would inflate the general price level and reflate the economy out of debt problems; that the so-called “wealth effect” from inflating securities prices would spur spending, risk-taking and sustainable economic recovery.

    From the perspective of my “Financial Sphere vs. Real Economy Sphere” analytical framework, inflating the contemporary Financial Sphere in hope of spurring sustainable economic recovery is an absolute fool’s errand. It’s nothing short of reckless. To inflate Financial Sphere excess based on Real Economy Sphere indicators (i.e. GDP, the unemployment rate or CPI) is lunacy. After all, we have ample historical evidence of Financial Sphere dynamics detached from real economies. And especially after the past two years, we have witnessed how the separate Spheres have price dynamics completely divorced from each other (wild securities price inflation vs. disinflationary forces commanding consumer price aggregates).

    As I’ve repeated on numerous occasions, there is no general price level for the Fed or global central bankers to manipulate and control. The domain of their reflationary policies is within the Financial Sphere and with financial asset prices. And we’ve already seen how aggressive Global Financial Sphere inflationary measures can actually promote disinflationary forces in real economies.

    Financial Sphere inflation is little more than wealth redistribution.

    I’m sick of hearing the sympathetic “central banks are only game in town.” It’s just hard to believe at this point that flawed central banking is not held accountable for the mess it’s made of things. Greenspan and Bernanke argue that it’s not the responsibility of central banks to prick Bubbles. The Bernanke doctrine held that Bubbles could be allowed to run, with enlightened post-Bubble “mopping up” measures waiting to reflate markets, price levels and economies. But bursting Bubbles and the resulting realization of gross wealth redistribution and economic stagnation leave politicians in a major bind. To be sure, massive “mopping up” monetization and deficit spending are dangerously divisive issues. Central banks become the “only game” because they operate largely outside the political process; enjoy the unique capacity to create rules as they go along; and dictate policies in an area that so few understand. Regrettably, this era's sophisticated inflationism is even more seductive than its predecessors.