American Interest Rates, Whereto?

American Interest Rates, Whereto?

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The Fed is again making noises about raising interest rates. But is not very convincing, and the markets are not taking them too seriously.

The Fed itself doesn’t seem to be very clear on what is happening to the US and World economy, nor clear about what the best course of action is. Consequently, it is emitting confused and confusing signals.

Janet Yellen, the Fed Chairman, recently indicated in a speech at a monetary conference in Wyoming “that the case for a rate increase had grown stronger”, with a possibility of one or more increases coming this year beginning in September! However, she did not specify the triggers that would commence a rate hike, only indicating that continued low unemployment plus inflation at or above 2% would encourage taking action.

The US economy is still sluggish and there is no reason to believe that a miraculous upward leap is about to occur. the employment data is still in dispute among economists. Some, view it at technical full-employment levels, while others believe no such thing, and insist that the “goal posts” have been moved, and the employment index formula altered to show lesser unemployment than actual. Also, the Debt is still growing to frightening peaks and exports, other than arms sales, are dismal.

The absence of clarity at the Fed can be summarized in the following quote: “In her speech, Yellen noted that Fed officials have a wide range of views on where rates will likely be in the coming years. She said current forecasts imply a 70 percent probability they will be between 0 percent and 3.75 percent at the end of 2017.” A 70% chance of between 0% and 3.75% after a year and a half? How imprecise can one be?

No doubt, it must be difficult, as well as frustrating, for a central bank to manage monetary policy with interest rates at zero or near-zero. But, that does not justify raising them. Nor, does it justify a repeat of “Quantitative Easing”, which only superficially addressed the problem, and further skewed the economy.

It may be better for the US to simply follow good-old housekeeping principles, and remember Shakespeare’s: “Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry”. This applies not only to the US, but also, to the rest of the world. It may be much wiser, to handover the management of our economies to our sweet old, but firm, grandmothers!

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