Should the Fed raise interest-rates?

[Aimless]

I hear it's just around the corner. Would it be wise? Would it be foolish or dangerous? Would it be neutral? What would be the specific consequences?

[Dreadnaught]

So happy they are finally raising rates! But I fear they should have a year earlier, as the risk of recession seems quite high. And I question their ability to push rates up in a smooth fashion (granted, 0.25% is still a painfully low rate).

Ultimately too much capital is sitting on the sidelines, the rates be damned.

[wiggin]

So happy they are finally raising rates! But I fear they should have a year earlier, as the risk of recession seems quite high. And I question their ability to push rates up in a smooth fashion (granted, 0.25% is still a painfully low rate).

Ultimately too much capital is sitting on the sidelines, the rates be damned.

I'm not sure I follow your logic - they should raise rates earlier because of a high risk of recession? One would think that a recession risk should be a signal for looser, not tighter monetary policy. There's still plenty of slack in the labor market and inflation is subdued. I don't think early tightening would have been wise.

Now, the timing is probably decent. Hard to know if global weakness in both growth and currencies is going to spell trouble for the US in a tightening monetary environment, but labor markets look okay enough for a modest tightening. Agreed that there's a lot of money on the sidelines, but I doubt that the slight increase in rates is really going to have such a big impact one way or another - I think the rise is more of a signal to markets than anything else.

I believe you allude to this issue, but it's worth repeating: we are in a new normal of very low rates. It's highly unlikely the recovery will continue long enough for rates to get into 'normal' territory, and QE remains to be unwound. I think it's likely that we're looking at one or two business cycles at least before rates and the Fed's balance sheet get closer to traditional levels. It may never get back there given demographic etc. headwinds to growth and increasing savings. In the meantime we should expect to see substantial increases in the use of macroprudential measures to manage the economy in the absence of much room above the zero lower bound.

[Lewkowski]

I'm in favor of the rate being raised. Keeping rates artificially low creates bubbles.

[GGT]

Are you in favor of the Federal Reserve deciding interest rates?

There's been a lot of debate about how to define value, the cost of debt, and by whom.

[Lewkowski]

Are you in favor of the Federal Reserve deciding interest rates?

There's been a lot of debate about how to define value, the cost of debt, and by whom.

I'd be OK with the market deciding instead.

[Dreadnaught]

I'm not sure I follow your logic - they should raise rates earlier because of a high risk of recession? One would think that a recession risk should be a signal for looser, not tighter monetary policy. There's still plenty of slack in the labor market and inflation is subdued. I don't think early tightening would have been wise.

Now, the timing is probably decent. Hard to know if global weakness in both growth and currencies is going to spell trouble for the US in a tightening monetary environment, but labor markets look okay enough for a modest tightening. Agreed that there's a lot of money on the sidelines, but I doubt that the slight increase in rates is really going to have such a big impact one way or another - I think the rise is more of a signal to markets than anything else.

I believe you allude to this issue, but it's worth repeating: we are in a new normal of very low rates. It's highly unlikely the recovery will continue long enough for rates to get into 'normal' territory, and QE remains to be unwound. I think it's likely that we're looking at one or two business cycles at least before rates and the Fed's balance sheet get closer to traditional levels. It may never get back there given demographic etc. headwinds to growth and increasing savings. In the meantime we should expect to see substantial increases in the use of macroprudential measures to manage the economy in the absence of much room above the zero lower bound.

No, I think we've been out of a recession for a while but growth has been slow (risking reversion to recession) because of economic hangover and poor policy.

Nonetheless, we long-ago got all we could get from interest rate manipulation. We should have raised rates a while ago to give the Fed room to adjust for the next recession. Which may be around the corner. It sure doesn't look great in many economies.

[RandBlade]

I'd be OK with the market deciding instead.

The market does ultimately. Just ask Greece.

[GGT]

The market does ultimately. Just ask Greece.

Isn't that a bit simplistic? Greece was accepted into the EU, with all their internal corruption and sovereign debt.....but they didn't take "advantage" of their geographical location when it came to war-torn refugees from Syria/Iraq/Afghanistan streaming into Europe....and use that as leverage? Huh?

[Lewkowski]

The market does ultimately. Just ask Greece.

And look at the harm that was caused by government interference.

[GGT]

No, I think we've been out of a recession for a while but growth has been slow (risking reversion to recession) because of economic hangover and poor policy.

Nonetheless, we long-ago got all we could get from interest rate manipulation. We should have raised rates a while ago to give the Fed room to adjust for the next recession. Which may be around the corner. It sure doesn't look great in many economies.

I'll agree if that 'poor policy' includes our do-nothing congress that expects the Federal Reserve to take up their slack -- as if monetary policy can work without legislative fiscal policy. I said a long time ago that interest rates should go up slightly and gradually (even before all the QE efforts are unwound) since that would encourage/benefit savers....and maybe help us move back to an equilibrium that's not so debt-and-credit-heavy.

Besides, a near zero interest rate mostly benefitted Big Banks and Wall Street traders etc., not the average tax payer. And look where we are now: the banks are even bigger (in assets) and the stock market was riding high (until 1/16); but John Q Public's wages are still stagnant, student debts surpass credit card debt, and the RE market still hasn't recovered.

I'm not sure what point you are trying to make. Of course a one line remark is simplistic.

My point was that most national problems (including Greece's) are geo-political. When people say "let the markets decide" or "the markets will ultimately decide"....that's discounting just how much "the markets" are shaped by governmental policies.

Those policies include things like immigration, refugees/asylum, border controls, identifying enemies, knowing international sanctions, all sorts of things. So who dropped the ball in the EU? Was the EU was so eager to create an economic union that they relied too heavily on a common currency and monetary policy....and didn't pay the necessary attention to a struggling nation (Greece) that's basically a port-of-entry from the war-torn Middle East?

That's an analogy to what's happening in the US: monetary policy can't fill a legislative/policy void. (China is learning that in fits and starts, too.)

[RandBlade]

I'm not sure what point you are trying to make. Of course a one line remark is simplistic.

[GGT]

Wow, I didn't think Fed interest rates would take us back to early 2016. Did I miss a thread somewhere?

I loathe the way Wall Street has dominated monetary policy, but I can't blame them for filling a void in fiscal policy that congress refuses to address. So what's the role of a Federal Reserve/Central Bank after all? It's supposedly an apolitical agency, but does anyone really believe that?

[Dreadnaught]

When did all student debt become "nationalized" by Executive Order?

Student loans owned by the federal government are about $1 trillion, up dramatically since 2010 since Obama basically kicked-out most of the loan originators. There's about $1.3 trillion total student debt.

https://www.bloomberg.com/view/artic...f-student-debt

https://fred.stlouisfed.org/series/FGCCSAQ027S

[GGT]

Student loans owned by the federal government are about $1 trillion, up dramatically since 2010 since Obama basically kicked-out most of the loan originators. There's about $1.3 trillion total student debt.

There's something weird and misleading about that chart. Surely there weren't zero (0) federally owned student loans until 1995. And the charts don't show total number of loans (or loans per student), or the rising costs of college. So just using dollars as the main metric doesn't mean much, or put things into context.

It's also misleading to call it an "Obama blunder", since congress controls funding and enables regulatory agencies. The private loan sector likely shrank because they were making predatory-type student loans at exorbitant interest rates, that could never be discharged in bankruptcy. Hell, it's 'cheaper' to max out multiple credit cards, default on those loans, and then file for bankruptcy protection....than getting a dedicated 'student loan' from the same bank.

I do think it's outrageous that the federal gov't makes a tidy profit on student loans, but I'm not convinced that is what slows down or prevents structural reform per se. I think the perverse incentives come from special interest/lobbyist groups, whose money (campaign contributions) influences legislators.


But getting back to central banks and interest rates....it's getting harder for Yellen to claim the Fed is "apolitical", when she says they consider what other central banks are doing across the globe, and admits some of their decisions are political. And when asked if it was appropriate, or a potential conflict of interest, if a regional governor (who might hope to be the next Fed chair) made contributions to a presidential candidate...she looked dumbstruck. I watched her live testimony, and it seemed to me she didn't have a clue what "political" meant. She just kept repeating how they never discussed politics in their meetings.