
Can the Fed raise interest rates? - dougbright
http://qz.com/492940/what-if-the-fed-cant-raise-interest-rates/
======
roymurdock
The crux of the problem is that the Fed is "pushing on a string" \- playing
with the supply side of money while having absolutely no effect on the demand
side.

Thomas Palley [1] sums this up nicely in a 2011 critique of QE:

 _The underlying problem is structurally deficient demand caused by thirty
years of neoliberal economic policies that have undermined the income and
demand generation process (Palley, 2009). However, rather than fixing this
problem, policymakers are again turning to ultra-easy monetary policy in the
form of QE. Viewed from this perspective, QE can be interpreted as a form of
asset market trickledown whereby supporting asset prices is supposed to
jumpstart the macro economy…From a political standpoint, this is an enormous
change from the world of forty years ago. The New Deal policy paradigm of wage
floors and household income supports has been replaced by one of asset price
floors and asset market subsidies. Viewed through a political lens QE
therefore represents the triumph of plutonomics, and that makes it an
obstruction to the extent it obscures the challenge of repairing the income
and demand generation process._

The Fed has dug itself into a hole with QE, where it is losing the ability to
control anything in the economy due to the lower 0 bound of the FFR and the
economy's inability to handle an interest rate hike.

It is up to the Federal Government (which, democratically speaking, means we
the people) to adopt New Deal-like investments in infrastructure, R&D,
education, and tech to seed long-term prosperity in order to rebuild an
economy with a strong middle class that will demand loans for things like
mortgages, appliances, cars, and machinery, as well as drive invention and
wealth creation rather than rent-seeking & arbitrage as we are seeing today.

[1]
[https://ideas.repec.org/p/uma/periwp/wp252.html](https://ideas.repec.org/p/uma/periwp/wp252.html)

~~~
mpweiher
You mean: "we keep pouring money in at the top, but it just isn't trickling
down" ?

~~~
chralieboy
Precisely.

In Silicon Valley it would be like a company that is raising record amounts of
money at mind-boggling valuations but whose revenue isn't growing at the same
pace.

One of the major question marks has been wage growth during the recovery.
Stock markets have been skyrocketing, but wages have generally remained
stagnant.

Similarly, labor participation (i.e. of the people who could work, how many
are actively looking/employed) has remained worryingly low. While the US
unemployment rate is very low (~5.1%), that isn't a direct inverse of those
who are employed. There is a huge group of people who have simply given up
trying to find work and others who are working but less than they would like
(e.g. part-time, have one job but would like to work another/overtime, etc.)

We see that effect on inflation, which is no where near the 2% level that the
Fed would like. Inflation crudely correlates with real growth because it
encourages spending; if the money I have will be worth less in the future, I'm
more likely to spend it today.

So in effect, we look at the S&P and think "Awesome! We're at all time highs!"
But then we look at the economic fundamentals for people and it looks less
sketchy.

~~~
igravious
Don't you mean "more sketchy", as in we look at the S&P and think "Yay" But we
are getting dubious signals from the so-called real economy that do not
correlate with the signals we are getting from the stock market. Hence, "more
sketchy", no?

------
goodcanadian
From the article:

 _Why doesn’t the Fed sell its Treasury bonds then?

Because there’s no one buyer big enough to purchase them. The Federal Reserve
itself is now the world’s largest holder of US government debt, after its
bond-buying programs pushed its holdings above those of China._

In an otherwise interesting and well written article, this is just an absurd
statement. They are under no obligation to sell all of them. They can sell
whatever amount is appropriate to lower the price (and raise the rate) to
where they want it. Further, toward the end of the article, it is suggested
that they might have trouble raising the long term rates even if they are able
to successfully raise the short term rate . . . well, duh, sell some of the
long term treasury bonds.

~~~
chralieboy
Thank you for this, it is spot on.

It's like saying Amazon can't have a sale because then it would have to lower
the price of every item it sells.

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amluto
That 10% reserve number is interesting. I learned about the 10% reserve ratio
in macroeconomics class, where I also learned that there's this thing called
the money multiplier. See, if banks are required to hold a fraction r (10%) of
their deposits in reserve, then obviously they'll lend out the rest, which
will in turn be held or spent by the borrower, and one way or another it'll
end up back in a bank. So a (1-r) fraction of the actual cash and Fed-issued
money ends up lent out and redeposited. But the banks can loan out a (1-r)
fraction of /that/, ad infinitum. So the total amount of deposited money is 1
+ (1-r) + (1-r)^2 + ... = 1/r of whatever money (cash and things actually
deposited at the Fed) the Fed created in the first place. Since r = 10%, the
multiplier is 10.

The official page AFAICT is here:

[http://www.federalreserve.gov/monetarypolicy/reservereq.htm](http://www.federalreserve.gov/monetarypolicy/reservereq.htm)

The effective ratio is actually under 10% these days.

Edit: Fixed an inconsequential typo.

~~~
chinathrow
Well written, thank you. It's beyond my understanding why the fractional
reserve banking is allowed by western societies. Why should banks be able to
do this, but not other companies or even private persons?

~~~
forgetsusername
> _Why should banks be able to do this, but not other companies or even
> private persons?_

Companies and individuals are most certainly able to create "money" on their
own. You can issue all the debt you want, as long as you find a willing
counterparty and sign your own name to it. It's balance sheet expansion.

For example, you go to purchase a new car, and sign a note telling the dealer
that you will pay the price of the car, plus interest, over five years. You've
created an asset out of nothing, for which the bank is more than willing to
pay the dealer cash for. People and companies create such assets every day.
There is no magic to issuing your own liabilities, which is what the Fed does
when it prints money.

------
msandford
> If the Fed tried to sell its bond portfolio it would likely tank the market
> and cause interest rates to spike, undoing much—if not all of—the beneficial
> economic effects its efforts have achieved over the last few years.

Isn't that exactly the goal? To "raise interest rates"? I mean, the solution
to the problem is the thing that they can't do? I don't get it. It makes no
sense. The argument is circular.

If rates would spike too much -- which is the same as saying bond prices are
falling -- then all they have to do is slow the rate at which they're selling
the portfolio.

------
jhulla
The problem is that the Fed _must_ corner the market in Fed Funds in order to
meet their objective. They must set the price floor. In the past, this market
was small and controlled by the Fed.

Now in ZIRP, the Fed claims they will solve this problem by doing reverse
repos with a wide array of counterparties. The list of counterparties is here:
[http://www.newyorkfed.org/markets/rrp_counterparties.html](http://www.newyorkfed.org/markets/rrp_counterparties.html)

Their current limit is $300B - what happens when say, $4 trillion dollars
shows up asking to be paid at the Fed's targeted rate. If the rate were 0.5%,
that would be $20 billion a year that the Fed would need to pay out. If they
limit it to the first $300B, then they _cannot_ hold the rate at 0.5%. Can the
Fed pay $20B in interest a year?

IMHO, long way of saying, after taking the economy to ZIRP, the Fed has to
find a safe way to drain the system of excess reserves before they regain
control of Fed Funds.

------
leaveyou
"The Fed is by definition the safest place to put your dollars in the
world—because it has the ability to create any money in might need to pay you
back." This is fantastic. "The Fed can only pay interest on reserves to one
type of institution: banks" This is not fantastic. Why can't I as a simple
citizen, put my money at Fed and take advantage of the safest interests ever
known to man ? This discrimination has to cease or am I missing something ?

~~~
elemeno
You can - buy T-Bills. You can even buy them directly from the US treasury at
[https://www.treasurydirect.gov/indiv/products/prod_tbills_gl...](https://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm)

This is pretty much exactly what the banks are doing, albeit at a larger
scale. They buy T-Bills, or other equivalents such as Gilts (UK government
backed bonds) as they're as secure as investments get - with reduced returns
as the compensation for the increased security of the bonds being backed by
one of the worlds major economies.

For more information -
[https://en.m.wikipedia.org/wiki/Government_bond](https://en.m.wikipedia.org/wiki/Government_bond)
and
[https://en.m.wikipedia.org/wiki/Bond_(finance)](https://en.m.wikipedia.org/wiki/Bond_\(finance\))

------
jegutman
So first the fed cut rates and many people called them unprincipled and we
would have run away inflation "just around the corner" and they were shown to
be quite wrong. Now these same people are calling for raising rates what
traditionally used forms of data suggest is at least a little too early and
there seems to be a possibility that the fed is going to raise rates.

------
Kinnard
They can't raise the rate because of structural flaws in the fractional
reserve banking system. It might actually break this time.

------
mpg33
> How did the Fed push these reserves into the system? Easy. It created them
> out of thin air, and used them to buy government securities from banks.

This type of economic wizardry can't be good...

~~~
MaysonL
Why?

~~~
davidgrenier
Creating money out of thin air ends up devaluing the currency that is
currently in circulation.

My understanding is weak and I'm still not clear whether the Zeitgeist
Movement's position on the matter is correct, but I'd recommend watching the
second of the Zeitgeist Movement's video on the matter to enrich your opinion.

~~~
tedsanders
Not necessarily. Over the past seven years the monetary base has expanded
significantly, yet inflation has remained super low.

It's true that creating money out of thin air increases the supply of money.
But the price of money is not set by one factor of supply alone. You also have
to consider the velocity of money (affecting supply) and the demand for money.
If these are changing too, then you can certainly increase the supply of money
without devaluing the currency.

Also you can have counterintuitive effects where increasing the supply of
money stimulates the economy increasing the demand for money thereby
strengthening the value of the currency overall.

------
Animats
The US Treasury could raise rates on their paper (T-bills and bonds) to push
rates up, but then the Treasury would be paying above market rate.

~~~
irln
I believe the rate is determined by the bidders at the auction and not by the
Treasury.

[https://www.treasurydirect.gov/instit/auctfund/work/work.htm](https://www.treasurydirect.gov/instit/auctfund/work/work.htm)

~~~
igravious
Exactly, otherwise Greece and other countries wouldn't have been locked out of
the commercial markets if they could set rates. German rates were/are low
because the German economy is thought to be a decent shape, Greek rates are
high because the opposite.

------
elektromekatron
_“The committee is confident that it has the tools it needs to raise short-
term interest rates when it becomes appropriate to do so,” Fed chair Janet
Yellen told Congress earlier this year, adding, “and to maintain reasonable
control of the level of short-term interest rates.”_

subtext - Keep a close eye on this situation, as it may require popcorn and a
safe viewing platform.

------
DiabloD3
Well, at this point, if the Fed is not forced to raise their rates, then you
might as well kiss the global economy goodbye.

Downvote me if you want, but what I said needs to have been said, no matter if
you personally agree with it or not.

~~~
Kinnard
You may want to explain more about why you feel that way for people who don't
have insights into your personal viewpoint or the broad arguments for that
matter :)

~~~
irln
I agree. Too often sweeping viewpoints are made without data. The crazy part
is this is not some grand hidden conspiracy, the data is out there to explore
and use to support arguments for and against the fed. [1][2]

[1] [http://www.federalreserve.gov/](http://www.federalreserve.gov/) [2]
[https://research.stlouisfed.org/fred2/](https://research.stlouisfed.org/fred2/)

~~~
jayfuerstenberg
Agreed, there is no conspiracy here. Just a series of systemic flaws. What's
scary is that there needs to be a discussion on this but few economists are
brave enough to voice their concerns. David Harvey, Steve Keen, and others are
stepping up but we need more people.

------
acd
Most central banks dictate that there should be 2% inflation, which means the
economy needs to grow 2% per year. But we live in a world with linear
resources so unless we talk about virtual goods the economy cannot grow that
much and still be sustainable over the long run. Basically it will violate a
nature law which says we cannot ventilate that much heat into space as the
economic growth requires.

"At that 2.3% growth rate, we would be using energy at a rate corresponding to
the total solar input striking Earth in a little over 400 years. We would
consume something comparable to the entire sun in 1400 years from now - See
more at: [http://physics.ucsd.edu/do-the-math/2012/04/economist-
meets-...](http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-
physicist/#sthash.xiFGrVJY.dpuf")

Further the FED is privatly owned by banks.

Economics is trying to violate nature laws, it cannot do that so the current
system will fail. A new sustainable economic system will emerge.

~~~
jpollock
As several people keep hammering into my head, inflation is not the same thing
as what people would consider "growth".

Depending on your school of economic thought, inflation represents the
increase in money supply. So, if I took away every $1 bill and replaced it
with a $100 bill, the willingness of everyone to now pay $100 for a coke is
inflation.

It seems to be an accepted principle that we want to keep people from hoarding
cash, so inflation of ~2% is wanted. It gives everyone a nice buffer to avoid
dipping into deflation.

~~~
acd
Point taken about inflation. But the thermophysics part still hold true
though. You cannot increase economic output a lot without using more energy
which will make earth boil.

~~~
HCIdivision17
The economy doesn't follow natural law, or - in many ways both literal and
figurative - any laws at all.

If you think it should, then it'll appear to violate all sorts of principles
all the time. In some cases it behaves like a closed system (employment in
countries), in others it's an open system (companies). Some cases money is
conserved (double entry booking), in others money behaves more like a Banach-
Tarski ball (think bank money multipliers).

~~~
jayfuerstenberg
Neo-classical capitalism doesn't even acknowledge the laws of nature let alone
follow them.

Jeremy Rifkin has written a lot of about this topic and his arguments that
economists should first learn the laws of thermodynamics before being set
loose on the economy.

His book, "The Third Industrial Revolution" touches on this topic quite a bit,
if your interested… [http://www.amazon.com/Third-Industrial-Revolution-
Lateral-Tr...](http://www.amazon.com/Third-Industrial-Revolution-Lateral-
Transforming/dp/0230341977/ref=sr_1_1?s=books&ie=UTF8&qid=1442434897)

