Can the U.S. economy weather interest rate normalization (2015)?

Robert in Ohio said:

Businesses are sitting on money because they are uncertain what is going to happen in the market once the training wheels are taken off, so whether the rates go up or down they should do so because of the market not because of artificial constraints by the FED. And increased interest rates will provide money to working people through interest on their savings, higher interest rates on loaned money enables banks to pay higher interest on deposited money. The cycle is important to the private sector spinning on and on as it is supposed.

Banks would much rather loan your money to me and keep their reserves in reserve - that is how the system works.

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No, imagep was correct.

Banks don't lend out of reserves, or any other pile of cash, capital, etc. There are no real constraints on bank lending, and there haven't been for many years. There are no "training wheels" in place. Interest rates have never been a function of savings or capital in the fiat currency era - the base rate is always set by Fed policy. There is no "natural" interest rate that occurs outside of Fed intervention.

You, like many others, are under the incorrect impression that banks somehow loan out your savings, and the interest rate they pay on your savings account is related to their return on investment. What your savings rate is in fact based on is the bank's cost of borrowing reserves from the Fed. When you deposit into your savings account, the bank your check was drawn on transfers reserves to the bank where you deposit the check. The only reason the bank pays you a bit of interest on your savings is because it is cheaper than borrowing reserves from the Fed or on the interbank market.

If you were to earn 5% on savings, like back in the good old days, it would only be because the government has chosen to raise the cost of borrowing reserves. In order for you to earn 5% on your savings (which don't get invested in anything), the government would have to pay higher interest on the national debt, people would have to pay higher interest on their mortgages and other loans, and businesses would have to pay higher interest on their borrowing. Meaning, far more of our available dollars would be flowing into the financial sector than into productive investment.

Interest rates follow the inflation rate, and for multiple reasons. With inflation last year at 0.7%, and deflation so far this year, there is absolutely no reason for interest rates to be any higher than they are now.

This graph shows a pretty good correlation of this fact:

Robert in Ohio said:

So long as artificial controls are used to keep interest rates unnaturally low, we will not know if the staggering recovery (stagnation in some eyes) is real and able to sustain itself and expand into a full fledged economic recovery or not

We will continue to be "going in the right direction" and not really in an economic recovery - the only real recovery so far is on wall street, in part because of the artificially manipulated interest rates

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Did you notice that the Fed ended its bond buying program last October and since then longer-term interest rates have dropped? On November 3rd, the 10-year Treasury was sitting at a yield of 2.36%. Today? 1.93%. The 30-year then? 3.07%. Today? 2.50% 43 or 57 basis points might not sound like much, but someone who invested in a long-term Treasury Bond fund such as the Wasatch-Hoisington U.S. Treasury Bond Fund is looking at a capital gain of about 13% in less than 5 months. People with the stomach to buy futures or Zeros on margin cleaned house. The same thing happened after previous rounds of QE ended and calls into question the Fed's ability to artificially manipulate long-term rates, i.e. the rates that are the best indicator of inflation sentiment. Toss in a rising dollar and falling commodities prices and I don't see much of a need to "normalize" rates at this point. "Normal" short-term rates would result in a flattened or inverted yield curve whose only result would be to upend the economy.

DA60 said:

The subject is what will happen if the Federal Reserve raises rates...and the Governors of the Fed are appointed by the POTUS AND Greenspan admitted that the Fed was controlled by the government.

And you say the thread is not about the White House?

Okaaaaay.

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If you want to make a thread about the President's economic policy, go right ahead. This thread pertains to monetary policy; more specifically the eventual normalization of interbank lending rates.

Ahlevah said:

"Normal" short-term rates would result in a flattened or inverted yield curve whose only result would be to upend the economy.

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Not to mention, rates would push back downward as the economy responds to changes in credit tightening. It would cost the Fed considerable credibility, as did the ECB in 2011, if it were to raise rates too soon, only to have to lower them again in the near term.

Ahlevah said:

Did you notice that the Fed ended its bond buying program last October and since then longer-term interest rates have dropped? On November 3rd, the 10-year Treasury was sitting at a yield of 2.36%. Today? 1.93%. The 30-year then? 3.07%. Today? 2.50% 43 or 57 basis points might not sound like much, but someone who invested in a long-term Treasury Bond fund such as the Wasatch-Hoisington U.S. Treasury Bond Fund is looking at a capital gain of about 13% in less than 5 months. People with the stomach to buy futures or Zeros on margin cleaned house. The same thing happened after previous rounds of QE ended and calls into question the Fed's ability to artificially manipulate long-term rates, i.e. the rates that are the best indicator of inflation sentiment. Toss in a rising dollar and falling commodities prices and I don't see much of a need to "normalize" rates at this point. "Normal" short-term rates would result in a flattened or inverted yield curve whose only result would be to upend the economy.

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They may have ended their bond buying, but bond buying isn't what influences interest rates.

The FEDS OWNING bonds, or rather large piles of bonds is what influences interest rates.

And the FED STILL owns those bonds and that will continue to put downward pressure on interest rates and that will continue to push investors into Equities and out of fixed yield investments.

Until the FED decides to sell off those bonds and Treasuries, interst rates will continue to be held down by the very same mechanism that kept them down when the FED was buying bonds.

Fenton said:

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Until the FED decides to sell off those bonds and Treasuries, interst rates will continue to be held down by the very same mechanism that kept them down when the FED was buying bonds.

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And is there any reason that the Fed would need to sell off those bonds? Can't they just allow them to mature over time, as to not suddenly increase interest rates?

imagep said:

And is there any reason that the Fed would need to sell off those bonds? Can't they just allow them to mature over time, as to not suddenly increase interest rates?

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There's no need unless they plan on keeping interest rates low for the next decade....which I doubt they'll do.

Rates being low is a indicator of a economy thats still stagnant and spinning its wheels

Can the U.S. economy weather interest rate normalization (2015)?

Of course not...which is why the Fed is so incredibly hesitant to move rates up even 0.25%.

And this shows, imo, what an utter failure all this neo-Keynesian recovery has been.

Almost six years after the 'Great Recession' officially ended, about $12 Trillion spent to artificially stimulate the economy PLUS ZIRP (zero interest rate policy) and what do you have?
An economy so pathetically weak and utterly dependent on government/Fed stimuli that the minute it is removed, the economy falls flat on it's face.

Shades of the New Deal. FDR got the economy of the 1930's SO addicted to the government crutch, that the moment it was taken away in 1937/38...the economy collapsed in a heap.
And that was 8-9 years after the Great Depression began.
It finally took WW2 to right the economy (sort of).

Neo-Keynesianism as a means to recover an economy faster and get it back on it's own feet is a huge failure.

DA60 said:

Can the U.S. economy weather interest rate normalization (2015)?

Of course not...which is why the Fed is so incredibly hesitant to move rates up even 0.25%.

And this shows, imo, what an utter failure all this neo-Keynesian recovery has been.

Almost six years after the 'Great Recession' officially ended, about $12 Trillion spent to artificially stimulate the economy PLUS ZIRP (zero interest rate policy) and what do you have?
An economy so pathetically weak and utterly dependent on government/Fed stimuli that the minute it is removed, the economy falls flat on it's face.

Shades of the New Deal. FDR got the economy of the 1930's SO addicted to the government crutch, that the moment it was taken away in 1937/38...the economy collapsed in a heap. It finally took WW2 to right the economy.
And that was 8-9 years after the Great Depression began.

Neo-Keynesianism as a means to recover an economy faster and get it back on it's own feet is a huge failure.

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Lets see....the 1937 recession was due in large measure to FISCAL cutbacks, tax increases and monetary tightening......NOT from purely interest rate hikes. But don't let minor details get in the way of your goldbug POV.......please, by all means, continue.

Fenton said:

There's no need unless they plan on keeping interest rates low for the next decade....which I doubt they'll do.

Rates being low is a indicator of a economy thats still stagnant and spinning its wheels

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Why wouldn't they want to keep interest rates low, forever?

Interest is the price of money, money can be made in virtually unlimited quantities at virtually no cost, thus there is no reason that money should be expensive. Expensive goods generally are expensive because they are scarce and it's expensive to produce more.

Maybe low rates is going to be the new norm because there is no economic reason for rates to be higher.

imagep said:

Why wouldn't they want to keep interest rates low, forever?

Interest is the price of money, money can be made in virtually unlimited quantities at virtually no cost, thus there is no reason that money should be expensive. Expensive goods generally are expensive because they are scarce and it's expensive to produce more.

Maybe low rates is going to be the new norm because there is no economic reason for rates to be higher.

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As long as the economy remains stagnant, no there is no good reason to raise interest rates.

If there was a robust recovery, and large amounts of stagnant capital started making its way out into the economy the FED might decide to take measures to pull some of that excess liquidity back to avoid inflation.

Think about it.

The Fed currentlt has Trillions of excess reserves sitting idle on their books with interest rates bottomed out.
And the economy is still stagnant.

People ( for partisan purposes ) are dismissing so much when it comes to taking an objective look at the health of our economy.

Those two indicators alone points to a economy on life support and they are not the only indicators.

Prior to 2008 Banks never let excess liquidity sit around earning nothing. But we have Trillions in excess liquidity doing just that.

Something is very very wrong.

DA60 said:

It finally took WW2 to right the economy (sort of).

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And who did all the spending in WWII? The government, maybe?

Fenton said:

As long as the economy remains stagnant, no there is no good reason to raise interest rates.

If there was a robust recovery, and large amounts of stagnant capital started making its way out into the economy the FED might decide to take measures to pull some of that excess liquidity back to avoid inflation.

Think about it.

The Fed currentlt has Trillions of excess reserves sitting idle on their books with interest rates bottomed out.
And the economy is still stagnant.

People ( for partisan purposes ) are dismissing so much when it comes to taking an objective look at the health of our economy.

Those two indicators alone points to a economy on life support and they are not the only indicators.

Prior to 2008 Banks never let excess liquidity sit around earning nothing. But we have Trillions in excess liquidity doing just that.

Something is very very wrong.

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Yup. People aren't borrowing, we aren't in a housing boom, and businesses are satisfying all realized demand with current facilities.

When I step back and look at it, low demand is the root cause for all of this. Hmm, now what could cause low demand, could it be stagnate wages?

Fenton said:

They may have ended their bond buying, but bond buying isn't what influences interest rates.

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That's a curious statement. The Treasury sets rates at auction in a bidding process, and those rates are based on demand for debt. The lower the demand, the higher the rate in order to attract bidders. Of course, the Fed doesn't buy its debt directly from the Treasury, but its absence as a buyer would, one would think, increase the supply of available debt in the marketplace, all other things being equal (which we know are not, such as the amount of debt being issued and increased demand from other sources, such as institutional investors and domestic and foreign commercial banks and even some other central banks).

Fenton said:

The FEDS OWNING bonds, or rather large piles of bonds is what influences interest rates.

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What's influencing rates is the deflation sweeping Western industrialized nations in the wake of the popping of massive assets bubbles (principally in real estate).

Fenton said:

And the FED STILL owns those bonds and that will continue to put downward pressure on interest rates and that will continue to push investors into Equities and out of fixed yield investments.

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Right. And so are the banks that would rather buy a 10-year Treasury yielding almost 2% as opposed to a German 10-year that yields 0.20% or a 2-year that they have to pay the German government to own even as it's denominated in a currency that's losing value relative to the dollar. So the question we should be asking is why would we want the Fed to tighten credit under these circumstances. If there's an answer it would revolve somewhere around the thesis that Western governments have spent spent decades propping up unproductive enterprise with ever more spending and debt to the point that they've reached "reflation apogee," or the point at which reflation in the normal sense simply isn't effective. So we should either clean the slate by letting the sluggards fail (with the concomitant bankruptcies, deflation, and unemployment) in order to redeploy capital, or we can just slog along with more piles of debt and low real GDP growth until the final day of reckoning comes.

DA60 said:

Recovering? With respect; sure, at a snails pace...

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Relative to what? Past recoveries? I get the feeling you're blaming the slow recovery entirely on the recovery actions and ignoring major shifts in our economy decades before the actual crash. Wages and the need for labor has been falling for 40 years. Those things have not changes so I do not expect a miraculous recovery. Great recession was a symptom, not the disease.

Further, I don't know why everybody always bashes the fed. Its like blaming the nurse for a botched operation. It seems we forget that fiscal policy was also an option, but that department decided largely to sit on its hands.

pdog said:

Relative to what? Past recoveries? I get the feeling you're blaming the slow recovery entirely on the recovery actions and ignoring major shifts in our economy decades before the actual crash. Wages and the need for labor has been falling for 40 years. Those things have not changes so I do not expect a miraculous recovery. Great recession was a symptom, not the disease.

Further, I don't know why everybody always bashes the fed. Its like blaming the nurse for a botched operation. It seems we forget that fiscal policy was also an option, but that department decided largely to sit on its hands.

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You are primarily talking about the 'Great Recession', not the recovery. I am doing the opposite.

But, imo, the reasons for both are the same - too much government involvement in the economy.

Between massive fiscal deficits, too much government welfare (some is good, too much is bad), WAY too much Fed involvement and federal governments trying to run the economy (like Bush's idiotic low income housing initiative) when they should be stepping back and letting the free market run things...the economy is skewed horribly.

Plus, these government initiatives primarily help the rich - QE's, ZIRP, mark-to-market rule changes, too-big-to-fail, TARP, gigantic military industrial complex and on and on.

And the only thing that has really skyrocketed since the end of the 'Great Recession' is the stock market - mostly thanks to the Fed. Everything else is more or less static. And who benefits most from a rising stock market? The rich.

You want to arrest the decline of the middle class? End/neuter the Fed, balance the federal budgets and let the markets run themselves.

pdog said:

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Further, I don't know why everybody always bashes the fed....

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I've always wondered why every yahoo on the street thinks that they know more about economics than the PhDs at the Fed who graduated at the top of their class from our best universities.

So the barber took home ec. high school, that really makes him an expert in economics - yea, you better believe every word he tells you.

DA60 said:

You are primarily talking about the 'Great Recession', not the recovery. I am doing the opposite.

But, imo, the reasons for both are the same - too much government involvement in the economy.

Between massive fiscal deficits, too much government welfare (some is good, too much is bad), WAY too much Fed involvement and federal governments trying to run the economy (like Bush's idiotic low income housing initiative) when they should be stepping back and letting the free market run things...the economy is skewed horribly.

Plus, these government initiatives primarily help the rich - QE's, ZIRP, mark-to-market rule changes, too-big-to-fail, TARP, gigantic military industrial complex and on and on.

And the only thing that has really skyrocketed since the end of the 'Great Recession' is the stock market - mostly thanks to the Fed. Everything else is more or less static. And who benefits most from a rising stock market? The rich.

You want to arrest the decline of the middle class? End/neuter the Fed, balance the federal budgets and let the markets run themselves.

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I don't think I'm talking about the great recession at all. I'm talking about systemic problems that are over 40 years in the making. But rather that a slow decline, the great recession was merely the time were these problems jumped out in a big way. They could have came out sooner, but they were masked with a tech boom and credit.

I do not necessarily deny how the fed policies might be biased. But I'll say it again - this is all they have in the absence of fiscal action. I simply don't understand how you can bash the fed when no other sector is doing anything, not the private sector and not the government. But to be honest, i don't understand how you can recognize the bias and then ignore how wealth pools - aren't you also one that is against progressive taxes? If fed policy are biased why not correct the bias? You mean there's a possibility that the wealthy didn't "earn" their money?

Finally, I wish I could believe that the "markets" will run themselves. There was a period where I could believe that - when the world was made up of tiny markets everywhere. Disparity and productivity was limited to the size of the market. But with the massive national and global markets today, those bounds are gone. A very few number of people can utilize the efficiencies and gains of an entire society. This was not a problem created by "big government". Our idea of the "free market" needs to evolve. We can let the free market do what it does - monetize the wants, needs, and advancements of our society. But nobody has been even close to convincing me that a free market is capable of sustaining itself forever. We have reached the point where it needs support.

Ahlevah said:

That's a curious statement. The Treasury sets rates at auction in a bidding process, and those rates are based on demand for debt. The lower the demand, the higher the rate in order to attract bidders. Of course, the Fed doesn't buy its debt directly from the Treasury, but its absence as a buyer would, one would think, increase the supply of available debt in the marketplace, all other things being equal (which we know are not, such as the amount of debt being issued and increased demand from other sources, such as institutional investors and domestic and foreign commercial banks and even some other central banks).



What's influencing rates is the deflation sweeping Western industrialized nations in the wake of the popping of massive assets bubbles (principally in real estate).



Right. And so are the banks that would rather buy a 10-year Treasury yielding almost 2% as opposed to a German 10-year that yields 0.20% or a 2-year that they have to pay the German government to own even as it's denominated in a currency that's losing value relative to the dollar. So the question we should be asking is why would we want the Fed to tighten credit under these circumstances. If there's an answer it would revolve somewhere around the thesis that Western governments have spent spent decades propping up unproductive enterprise with ever more spending and debt to the point that they've reached "reflation apogee," or the point at which reflation in the normal sense simply isn't effective. So we should either clean the slate by letting the sluggards fail (with the concomitant bankruptcies, deflation, and unemployment) in order to redeploy capital, or we can just slog along with more piles of debt and low real GDP growth until the final day of reckoning comes.

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I was speaking specifically to QEs impacts on long term interest rates and how the mechanism of this influence still exist even after the FED stops buying assets.

As far as QEs success, its been abysmal. The Feds and the ECBs and the BoJs reasoning for QEs implementation are based on the assumption that liquidity and lower interest rates alone are what drives investments in Free market economies.

Its a ridiculous assertion to think the FEDs actions could and would directly counter the structural economic deflationary forces that are responsible for our economy's continued stagnation.

QE is is just another Ideological approach to a practical problem and its no surprise its happening in tandem with Fiscal stimulus and its no surprise its failing to achieve the Central Banks stated goals.

The ideology that represents the highly destructive concepts of a Country devaluing and spending their way into prosperity is the same ideology that lays the blame for the 2008 Financial Crises at the feet of the Free Market

They cannot positively influence what they do not understand and they cannot comprehend what they oppose on principle so they push these counter intuitive and purley ideological " solutions " and then wonder why 6 years later the economy is still stagnant.

Oh and deflation and the fact Corporations are hoarding capital and the Fact that over 80 percent of all the new liquidity created by QE sits idle on the books of the FED is a direct result of these structural economic issues being ignored.

Fenton said:

I was speaking specifically to QEs impacts on long term interest rates and how the mechanism of this influence still exist even after the FED stops buying assets.

As far as QEs success, its been abysmal. The Feds and the ECBs and the BoJs reasoning for QEs implementation are based on the assumption that liquidity and lower interest rates alone are what drives investments in Free market economies.

Its a ridiculous assertion to think the FEDs actions could and would directly counter the structural economic deflationary forces that are responsible for our economy's continued stagnation.

QE is is just another Ideological approach to a practical problem and its no surprise its happening in tandem with Fiscal stimulus and its no surprise its failing to achieve the Central Banks stated goals.

The ideology that represents the highly destructive concepts of a Country devaluing and spending their way into prosperity is the same ideology that lays the blame for the 2008 Financial Crises at the feet of the Free Market

They cannot positively influence what they do not understand and they cannot comprehend what they oppose on principle so they push these counter intuitive and purley ideological " solutions " and then wonder why 6 years later the economy is still stagnant.

Oh and deflation and the fact Corporations are hoarding capital and the Fact that over 80 percent of all the new liquidity created by QE sits idle on the books of the FED is a direct result of these structural economic issues being ignored.

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Part of the problem is that we have tasked the Fed with making the economy "good". I think you would agree that the Fed can't really do that. I'm not saying that monetary policy is of no value, but it's of very limited value. The first serving of monetary policy might help a tad, but piling heaps of newly created money into our banks doesn't help more.

The Fed is like a carpenter with just one tool, and when that tool is a hammer, then every problem looks like a nail.

imagep said:

Part of the problem is that we have tasked the Fed with making the economy "good". I think you would agree that the Fed can't really do that. I'm not saying that monetary policy is of no value, but it's of very limited value. The first serving of monetary policy might help a tad, but piling heaps of newly created money into our banks doesn't help more.

The Fed is like a carpenter with just one tool, and when that tool is a hammer, then every problem looks like a nail.

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I believe the FED did what they could knowing their influence was going to extremely limited.

They HAD to know.

Those people are far smarter than I am and I remember thinking back to when Bernake announced QE thinking to myself, " we're suffering from the effects of a credit bubble. How will monetary expansion increase demand for credit ?? "

Now that I've educated myself on QE it makes even less sense.

Fenton said:

I believe the FED did what they could knowing their influence was going to extremely limited.

They HAD to know.

Those people are far smarter than I am and I remember thinking back to when Bernake announced QE thinking to myself, " we're suffering from the effects of a credit bubble. How will monetary expansion increase demand for credit ?? "

Now that I've educated myself on QE it makes even less sense.

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Of course they knew, they ain't dummies. The economists at the fed graduated at the top of their class from the best universities in the world.

They gave into political pressures, attempting to appease people who were claiming that they weren't doing anything to fix the recession (not that there was anything that they could do), and they padded their private sector buddies pockets by purchasing bad paper.

I'm not one of the guys who stomps around blaming everything that's wrong with our economy on the fed, or claiming that it's secretly owned by the Rothchild family and in cahoots with Dr. Evil in his quest to take over the universe, but I'm not oblivious to it's shortcomings either.

imagep said:

Of course they knew, they ain't dummies. The economists at the fed graduated at the top of their class from the best universities in the world.

They gave into political pressures, attempting to appease people who were claiming that they weren't doing anything to fix the recession (not that there was anything that they could do), and they padded their private sector buddies pockets by purchasing bad paper.

I'm not one of the guys who stomps around blaming everything that's wrong with our economy on the fed, or claiming that it's secretly owned by the Rothchild family and in cahoots with Dr. Evil in his quest to take over the universe, but I'm not oblivious to it's shortcomings either.

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I have said and shown time and again that the Fed are macroeconomic ignoramuses. If all it took to be good at economics was to go to the best schools - then why are many of the richest men in the world relatively uneducated (compared to Fed members)?

All schooling teaches you is terminologies and theories...it almost never teaches you instincts and common sense. That is what you need to understand macroeconomics and their trends.

Yes, the Fed has some very intelligent people with degrees from incredibly prestigious universities...and still these guys/gals COMPLETELY missed the housing crash until it was well under way.


FED MINUTES REVEAL FOMC WAS CLUELESS AS ECONOMY CRASHED IN 2007

EconoMonitor : Great Leap Forward » FED MINUTES REVEAL FOMC WAS CLUELESS AS ECONOMY CRASHED IN 2007



The Fed is primarily made up of bankers. And if you deal with bankers then you will know that these people are great bean counters, but often ignorant about real world economics - which is why they are bankers and not entrepreneurs.

That is what the Fed is, a bunch of brilliant bean counters who are generally ignorant about nuts and bolts macroeconomics.

DA60 said:

I have said and shown time and again that the Fed are macroeconomic ignoramuses. If all it took to be good at economics was to go to the best schools - then why are many of the richest men in the world relatively uneducated (compared to Fed members)?

All schooling teaches you is terminologies and theories...it almost never teaches you instincts and common sense. That is what you need to understand macroeconomics and their trends.

Yes, the Fed has some very intelligent people with degrees from incredibly prestigious universities...and still these guys/gals COMPLETELY missed the housing crash until it was well under way.


FED MINUTES REVEAL FOMC WAS CLUELESS AS ECONOMY CRASHED IN 2007

EconoMonitor : Great Leap Forward » FED MINUTES REVEAL FOMC WAS CLUELESS AS ECONOMY CRASHED IN 2007



The Fed is primarily made up of bankers. And if you deal with bankers then you will know that these people are great bean counters, but often ignorant about real world economics - which is why they are bankers and not entrepreneurs.

That is what the Fed is, a bunch of brilliant bean counters who are generally ignorant about nuts and bolts macroeconomics.

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What could the Fed have done about the housing/subprime bubble?