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Investing and Economics Blog

The Fed Should Raise the Fed Funds Rate

The USA economy is far from strong. The global economy seems even weaker. Inflation is not an imminent risk. Under such conditions the USA Federal Reserve adding gasoline to the economy via low interest rates makes sense.

The issue I see is that a .25% Fed Funds rate is adding gasoline to the economy via low interest rates. Many people are saying an increase is like taking away the gasoline and taking out a fire extinguisher. But it really isn’t. Raising the rate to .25% is slightly decrease the amount of gas you are adding to the fire. A .25% Federal Funds rate is pouring nearly as much gas on as you are able to but not quite the absolute most you are able to.

It is also true that the Fed bailing out the too-big-to-fail bankers and banks resulted in them not only opening up the gasoline as much as possible (taking rates to 0) they even went far beyond that with new methods of pouring on gasoline that hadn’t even been considered until the bankers’ risk-taking doomed the economy (and bankrupted their institutions – without government bailouts propping them up).

The Federal Reserve has finally turned off the massive extraordinary dumping of gasoline onto the economic fire (via quantitative easing). But they have kept not only dumping lots of gasoline on the economy but doing so to the absolute maximum possible via a 0% Fed Funds rate.

Arguing for slowing the amount of fuel you are dumping into the economy is not the same as saying you are constricting the economy. We have been put into a crazy global economic condition by the too-big-to-fail bankers and the massive amounts of government and personal debt taken out. So simple analogies are not effective in making policy.

The analogies can help explain what the intent and expectation of the policy is. It is true we have created a very tenuous economic foundation (and we haven’t in any way substantial way addressed the risk too-big-to-fail bankers can throw the global economy into and we still have massive debt problems). The main beneficiaries of the central banker’s policies the last nearly 10 years are too-big-to-fail bankers and those borrowing huge amounts of money.

Those suffering from the policy are savers and I fear those that have to cope with the aftermath of this massive intervention with likely bubbles (government debt, personal debt [including education debt in the USA, etc.]). The main reason I believe rates should be raised are to begin the path to stop transferring wealth from savers to too-big-to-fail bankers and those with massive debt problems.


It is true the massively in debt governments have been given a huge transfer of wealth by central bankers and we have largely (across the globe) avoided runaway inflation. Europe has experienced some issues from one of the areas the central bankers have attempted to cover up by injecting gasoline – massive government debt. But overall governments have been able to pay much less to bondholders and therefore make deficits seem much less than they would be with more sensible interest rates.

The global economy is in a very fragile state and luckily inflation has not been a problem. But it seems to me we can’t just keep hoping that putting our feet all the way on the excelerator for years on end is really going to work without consequences. Most likely the risks increase the longer you pour on as much gasoline as you can (asset bubbles, careless taking on of debt, increasingly risky behavior by bailed out too-big-to-fail institutions…).

The risk of deflation and a deflation mentality is one of the only decent arguments (well also that inflation isn’t a risk, right now) against slowing how much gasoline is being poured into the economy (with 0% Fed Funds). The other is that the global economy is about to have real trouble even after years of pouring on as much gas as we can. But I think the risks of keeping pouring as much gas as possible is too great. We need to keep pouring on gas, just not at the absolute maximum level – so we should raise the rate to .25% this month.

I would likely wait 3+ months to do raise it to .5% though obvious depending on what happens that may change. We should get to 1% as quickly as we can, which is still very “accommodative” (pouring on gasoline). Beyond the system risks of creating instability by pouring on as much gasoline as possible continuously it also is bad as you have no room for flexibility if you wan to increase the flow of gasoline. While it is true you can resort to extra-ordinary measures such as the too-big-to-fail quantitative easing bailouts those should be restricted to emergencies such as those created when our politicians allow the behavior that necessitated those unprecedented bailouts (especially since those too-big-to-fail institution still pose huge risks today).

Related: Is Adding More Banker and Politician Bailouts the Answer? – Fed Cuts Rate to 0-.25% (2008) – The Precipitous Fall of the Ringgit Shows the Economic Risk in the Malaysian Economy

September 2nd, 2015 John Hunter | Leave a Comment | Tags: Economics

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