Federal Reserve and Interest Rates Essay

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Fed Policy Change



The most recent Fed policy change was the decision to raise rates by 25 basis points. It is expected that the Fed will raise rates three more times (probably by the same amount) in 2018 and there are roughly 60% odds that the Fed will raise one more time this year (perhaps in December). However, I do not expect this trend to continue, because the debt of the nation is so great that it is simply unserviceable. If rates are raised, the interest owed on the debt will increase and that means more money going just to pay the interest on the loans the country has racked up. At the same time, pension funds and other types of funds are chasing yield in risky markets (the stock market is at an all-time high this year) because they cannot earn enough in interest by purchasing bonds (since rates are so low). As for Dodd-Frank and regulation policy, this is not likely to have much impact on the Fed or constrain it in any way (Lodge, 2011). The real issues are what the Fed intends to do with rates and its balance sheet—that’s what the market cares about.



The Fed attempted to stimulate the economy with its unconventional monetary policy known as QE—quantitative easing—from 2008 to 2013. It has not been alone in this process: other central banks around the world have joined in and are still purchasing bonds to “stimulate” the obviously fragile economies of the world.

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The BOJ has a balance sheet that represents a deluge should it stop buying and start trying to unwind its portfolio (like the Fed is supposedly going to do). The ECB is another one that is still buying bonds and driving interest rates down. In doing so, these banks are propping up the stock markets but they are hurting savers and funds that require substantial returns on their investments (a ludicrously high 5%--by today’s standards—in most cases, which is why so many pension funds in states across the U.S. are warning of collapse and warning retirees not to expect their state governments to be able to make good on the promises they were given when they were employed).



In other words the Fed is trapped: if it doesn’t raise rates and start unwinding its balance sheet, it must admit that we are living in a….....

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References

Lodge, M. (September, 2011). The good, the bad and the uncertain of the Dodd-Frank.
Bank Investment Consultant 19 (9) p. 19

Nader, R. (2002, July 26). The musty dark corners of bank regulation. The Voice News,
Retrieved from http://www.thevoicenews.com/News/2002/0726/Front_Page/C5_Nader_-_Banks.html
 

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