7 ms·

Can the Fed raise interest rates?

69 points by dougbright 11y ago

goodcanadian 11y ago
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.
- irln 11y ago
  Interesting point. Of the $2.46 Trillion of treasury holdings, $638 Billion have a duration of 10+ years [1]. Of the $1.7 Trillion of MBS, not surprisingly almost all are over 10 years. [1]http://www.federalreserve.gov/releases/h41/Current/ http://www.federalreserve.gov/releases/h41/Current/
- chralieboy 11y ago
  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.
DiabloD3 11y ago
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 11y ago
  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 11y ago
    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 11y ago
      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.
amluto 11y ago
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 11y ago
  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?
  - throwaway1967 11y ago
    They do it without asking (the Federal Reserve Act was passed Christmas Eve 1913 - around the same time the IRS came into being, what a coincidence) and most people do not understand the harm in it (even here on HN).
  - irln 11y ago
    The fractional reserve system on its own is not necessarily the issue so long as those making the loans fairly value the assets that collateralize the loan. Which also dictates that the loans be collateralized in the first place :)
  - leaveyou 11y ago
    Unions and monopoly is bad. Competition is good. Except for lending and money creation. Banks must have monopoly on that, because.. shut up and go to work.
Kinnard 11y ago
They can't raise the rate because of structural flaws in the fractional reserve banking system. It might actually break this time.
msandford 11y ago
> 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.
acd 11y ago
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-physicist/#sthash.xiFGrVJY.dpuf" http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-... 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 11y ago
  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 11y ago
    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 11y ago
      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).
mpg33 11y ago
> 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 11y ago
  Why?
  - irln 11y ago
    One possible downside is that it undermines the "clearing" of a market. That is clearing the things that haven't worked.
  - davidgrenier 11y ago
    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 11y ago
      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.
    - dragonwriter 11y ago
      > Creating money out of thin air ends up devaluing the currency that is currently in circulation. To some extent, compared to not doing so, it does. But whether the extent a particular injection does this is undesirable or not depends on conditions, and manifestly the large injections of money by the Fed over recent years have not resulted in significant inflation.
leaveyou 11y ago
"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 ?
- lazypenguin 11y ago
  Because the system is designed for banks with large sums. If you want similar protection for your money while accruing interest then you can buy government securities (notes, bills and treasuries).
- elemeno 11y ago
  You can - buy T-Bills. You can even buy them directly from the US treasury at https://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm https://www.treasurydirect.gov/indiv/products/prod_tbills_gl... 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)
- HorizonXP 11y ago
  So then the obvious solution is to create your own bank and start depositing money in the Fed. If you can't create a bank, you could probably buy one. I know a YC company that was trying to do that, so it can't be that hard!
roymurdock 11y ago
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 11y ago
  You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?
  - roymurdock 11y ago
    Yes. I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper). Here are the 5 channels: 1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further reduce short term rates (zero lower bound) 2. The Tobin’s q channel whereby some of the liquidity is directed to the stock market, increasing stock prices and investment in turn 3. A wealth effect that increases consumption brought about by higher bond and equity prices 4. Expected inflation brings forward consumption and investment spending as households and firms purchase in the present rather than in the future when money is expected to lose real purchasing power (increased velocity of money due to inflation) 5. Increased net exports whereby some of the liquidity is used to purchase foreign reserves, decreasing the exchange rate and devaluing the dollar I'll leave it up to you to research whether or not these 5 channels have been effectively manipulated as Keynesians would have predicted through QE. But I have a feeling you already know the answer...Bonus points if you can answer this question: Why did channel #2 work so well, and why haven't we seen the supposed wealth effect (#3) predicted under a burgeoning stock market?
elektromekatron 11y ago
“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.
Animats 11y ago
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 11y ago
  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 11y ago
    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.
jegutman 11y ago
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.
jhulla 11y ago
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.

69 points by dougbright 11y ago

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.

irln 11y ago
Interesting point. Of the $2.46 Trillion of treasury holdings, $638 Billion have a duration of 10+ years [1]. Of the $1.7 Trillion of MBS, not surprisingly almost all are over 10 years. [1]http://www.federalreserve.gov/releases/h41/Current/ http://www.federalreserve.gov/releases/h41/Current/
chralieboy 11y ago
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.

DiabloD3 11y ago

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 11y ago
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 11y ago
  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 11y ago
    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.

amluto 11y ago

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 11y ago
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?
- throwaway1967 11y ago
  They do it without asking (the Federal Reserve Act was passed Christmas Eve 1913 - around the same time the IRS came into being, what a coincidence) and most people do not understand the harm in it (even here on HN).
- irln 11y ago
  The fractional reserve system on its own is not necessarily the issue so long as those making the loans fairly value the assets that collateralize the loan. Which also dictates that the loans be collateralized in the first place :)
- leaveyou 11y ago
  Unions and monopoly is bad. Competition is good. Except for lending and money creation. Banks must have monopoly on that, because.. shut up and go to work.

Kinnard 11y ago

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

msandford 11y ago

> 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.

acd 11y ago

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-physicist/#sthash.xiFGrVJY.dpuf" http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-... 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 11y ago
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 11y ago
  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 11y ago
    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).

mpg33 11y ago

> 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 11y ago
Why?
- irln 11y ago
  One possible downside is that it undermines the "clearing" of a market. That is clearing the things that haven't worked.
- davidgrenier 11y ago
  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 11y ago
    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.
  - dragonwriter 11y ago
    > Creating money out of thin air ends up devaluing the currency that is currently in circulation. To some extent, compared to not doing so, it does. But whether the extent a particular injection does this is undesirable or not depends on conditions, and manifestly the large injections of money by the Fed over recent years have not resulted in significant inflation.

leaveyou 11y ago

"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 ?

lazypenguin 11y ago
Because the system is designed for banks with large sums. If you want similar protection for your money while accruing interest then you can buy government securities (notes, bills and treasuries).
elemeno 11y ago
You can - buy T-Bills. You can even buy them directly from the US treasury at https://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm https://www.treasurydirect.gov/indiv/products/prod_tbills_gl... 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)
HorizonXP 11y ago
So then the obvious solution is to create your own bank and start depositing money in the Fed. If you can't create a bank, you could probably buy one. I know a YC company that was trying to do that, so it can't be that hard!

roymurdock 11y ago

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 11y ago
You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?
- roymurdock 11y ago
  Yes. I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper). Here are the 5 channels: 1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further reduce short term rates (zero lower bound) 2. The Tobin’s q channel whereby some of the liquidity is directed to the stock market, increasing stock prices and investment in turn 3. A wealth effect that increases consumption brought about by higher bond and equity prices 4. Expected inflation brings forward consumption and investment spending as households and firms purchase in the present rather than in the future when money is expected to lose real purchasing power (increased velocity of money due to inflation) 5. Increased net exports whereby some of the liquidity is used to purchase foreign reserves, decreasing the exchange rate and devaluing the dollar I'll leave it up to you to research whether or not these 5 channels have been effectively manipulated as Keynesians would have predicted through QE. But I have a feeling you already know the answer...Bonus points if you can answer this question: Why did channel #2 work so well, and why haven't we seen the supposed wealth effect (#3) predicted under a burgeoning stock market?

elektromekatron 11y ago

“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.

Animats 11y ago

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 11y ago
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 11y ago
  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.

jegutman 11y ago

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.

jhulla 11y ago

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.