Why did the Fed really raise rates?
Ok the Fed finally raised rates. Great! So what?
The details behind the Fed’s rate rise can be found here.There is little point in going into the details again. Once is enough.
In general we can say that the Fed raised rates to protect the Fed itself. To verify this in your
own mind, just ask yourself this simple question : What if the Fed had not raised rates on Dec 16?
The consequences might well have been catastrophic as all faith in the American monetary system might have immediately been lost. Moreover we have previously made it clear that as banks begin to demand a higher interest rate, the Fed would have to oblige. The last thing the Fed can afford is to become “irrelevant” and this is exactly what would have happened if the Fed did not raise rates this time. This is especially true given the employment report.
Had the employment report been less than it was, the Fed might find some excuse or other, but being that it seemed to be strong, there was no longer any choice for the Fed. Either the rates went up, or the Fed itself might be in doubt as a viable entity.
As for a warming economy which again we discussed before? Well it is as we have said before, that inflation is indeed on the rise in certain directions and this might force banks to raise market rates. But the truth is that this was not the real reason for the Fed increase this time.
The Fed could not let anymore doubt seep in to the public’s mind about its worthiness, and this is the overwhelming logic behind the rise in rates. A whole .25 of a percentage point! (Amazingly some had gone so far as to suggest one tenth of a percentage point rise instead! This is how psychologically necessary it was
to raise rates whatever the amount.)
Ok…so they did manage to raise rates..hooray. But so what does that signify going forward?
Well it is quite clear that this move is not in harmony with the Global economy. If it were all the other economies around the world would be ready to also raise rates. The simple logic is that if you have borrowed in dollars, why would you want to pay more in your own currency to repay the loan? Yet we can see that Europe, Japan, China, Asia, and Latin American are in no hurry to reciprocate the rate rise. The reason is
quite elementary. While the United States is trying to say “yes we can!” get ourselves off the ground, which we have been lying on for the past seven years, other nations are fast approaching the ground, and fear the resulting splatter may cause a serious bio-hazard. These nations are doing all they can to soften the blow of
collapse, and at the same time protect the outflow of money from their nations to the United States. But this reality makes it quite clear that things are not all that well in the Global Mudville. The fact that the U.S. is raising rates, while the others are devaluing their currencies points to severe problems up ahead given that
all these nations are connected in one way or other to the U.S. economy.
It is true that certain places are still warm. Germany certainly feels toasty, while the rest of Europe is freezing to death. The Germans have been a heat sponge, absorbing whatever economic heat there was in Europe. And so now they may feel too warm to go along with currency devaluations. This is much like New York and San Francisco in the United States which have managed to divert resources to their own environments, even as the surrounding areas have experienced frigid economic conditions. But soon this too will balance out. The Global economic cooling will eventually invade these
warm spots and the general economic climate will cool. The U.S. rate rise can only add to this cooling, and we are sure the Fed knows this quite well.
We should note here that it is true that as the dollar increases in value due to the rate rise, commodities will fall. This is in part a benefit to consumption in the short run. But the truth is that the United States has three industries that are pretty much its main industries and these are energy, agriculture and mining. All three
will be severely affected with the rate rise. Yes falling prices for natural resources does mean that the consumer can drive around the block an extra few times before calling it quits for the night, but this alone does not bode well for the economic future of the nation.
Therefore we should understand that the main reason the Fed raised rates was to protect the Fed, as we have said previously The Fed can in reality do one of two things, either speed up the economy, or slow it down. That’s all it ever should
have been able to do. Employment should never have been the concern of the Fed, and the fact that the Fed must consider employment is an egregious dispensation of necessary order and indicative of fundamental corruption of fundamental principles.
Slow the U.S. Economy
The Fed’s business should be either to speed up the flow of money, or slow it down(with some theoretical potential for direction of
credit.) When we say increase “liquidity” we mean to imply an increase in the “flow” of money, or rather an increase in both volume
and rate of flow. Thus the Fed, when first imagined as an institution, was supposed to command the ebb and flow of money, and thus control the basic growth or decay of the economy. The problem of Employment should have been left to the people, and should have been the direct concern of the elected government. This way the people could themselves ask how much they were willing to risk on stimulating the economy directly, as with secured loans, which they the people would be directly responsible for in the event of failure. Today’s system leaves the Fed, a shadowy group at best, in direct command of the people’s money, with little deference to those people whose money they are in reality using.
Still in this case, we can see that the Fed is choosing to slow the U.S. economy in order to protect its credibility. The more complete discourse can again be found here.
The rate rise will slow the U.S. economy down to be sure. But it will give the Fed the chance to go into some easing should it find it necessary down the line. The Immigration bubble is fueling the employment bubble, adding demand, and foreign capital to a sluggish economy. This adds jobs. However, foreign nations are now seeing their currencies devalued at rapid rates, and this
will make any immigration stimulus far more muted as it becomes harder to exchange foreign currency for the dollar. Still these immigrants can borrow, but all in all the impact will begin to lessen no matter what else is attempted. True a devaluation of the U.S. dollar going forward will increase the immigration impact, but its more likely that any devaluation of the U.S. dollar will be met with further devaluation of foreign currencies limiting any long term benefit from capital carrying immigrants.
Ultimately the employment bubble will have to burst and the oscillation will turn the other way. At that time the Fed may have enough “altitude” to attempt some sort of QE5 etc….but it will be very difficult to stop the slide.
P.S. There are those who say the problem is that we have reached “peak credit” and so the Fed needs to add incentive so that the Credit Junkies will take out more credit.
This is not true.
Credit is much like Heroin, no addict will ever say I have had enough. For as long as credit is offered
people will take it. That’s just reality. The only real problem is that the price of the dope has gone up due to latent and specific inflation. Thus it is necessary for the Fed to keep “official” control by announcing the proclamation of
higher interest rates, before the market just goes off on its own and raises rates on its own, with or without the Fed.
In fact, it is the reality that most often it is those entities deeply in debt, and quite desperate to make their next payments who are the most willing to take on new debts. Just like the junkie who will do anything for the next hit- blithely
hoping that the day after will bring a new dawn, and one day, she will quit….and her head will rise above the water. So is the state of the present credit market.