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posted on 17 June 2017

Raising The Federal Funds Rate Is A Good Thing?

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We all "know" there is a correlation between economic growth and the federal funds rate. This week the Fed raised their federal funds rate a quarter point.

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It seems very logical that an economy driven by credit could be slowed and accelerated by using interest rates. When viewing credit's relationship to GDP (see graph below), this relationship worked fairly well until the Great Recession.

Even offering significant reduced rates for consumer borrowing, it has not induced the consumer to borrow at a higher than the historical norm since the Great Recession.

Of course the federal funds rate used in the graphs above are not the rates the consumer or business borrows. But even so, the credit borrowing rates most of us see are low historically - but still did not induce a spending frenzy.

Business requires a return on investment, and obviously business is not seeing a potential of much return, reflected in weak response to the historically low rates of the past several years.

There is obvious growth decline in real estate loans, consumer loans, commercial and industrial loans. My position is most consumers or business do not spend money for items not needed - even with low interest rates. Demand for credit is low.

The consumer largest monthly outlay (housing) is being squeezed with rising costs for having a place to sleep.

It is hard to argue that the low interest rates were doing much good - the data does not support the concept that the ultra low interest rates were influencing economic growth. Is the consumer tapped out and credit is no longer a prime driver for consumer spending? It may not matter in the current environment what the interest rates are - as long as they are not too high.

Other Economic News this Week:

The Econintersect Economic Index for June 2017 continues to forecast normal growth for the second month in a row. Six-month employment growth forecast indicates modest improvement in the rate of growth.

Bankruptcies this Week from Gymboree, CST Industries, Soupman, GenOn Energy (f/k/a RRI Energy), CGG Holding

Weekly Economic Release Scorecard:

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