The Federal Reserve Needs To Raise Rates So That It Can Cut Rates!

by Michael Haltman

Confused? The Fed raising interest rates in order to be able to cut them at some point in the future is the rationale I am hearing on the business news!

The reason is that if (when) the United States economy heads into another recession, the Fed will have ammunition available to be able to take proactive steps to address the problem (beyond QE4 of course)!

So let’s get this straight…The Fed has kept interest rates at 0% for six or so years to aid the economy while at the same time increasing its balance sheet by trillions of dollars and yet the best the U.S. can muster is GDP growth rate of 2% or less?

At the same time that the monetary spigot has be wide open, personal income has barely grown, job security is a thing of the past and the jobs that are being created from all of the easing are either part-time or lower salary.

And further, while the rich have gotten richer (thanks to a skyrocketing stock market fueled by the aforementioned 0% interest rates), if you took a poll of Americans I would wager that a majority would tell you they feel as if we have never left recession after the financial crisis!

Now the Federal Reserve needs to raise rates so that if we officially reenter a recession they will be able to lower them again?

To tell you the honest truth at this point in time I would venture to say that few if any continue to have faith in how the Fed is managing its extremely important mandate!

And as a bit of an economic primer, the Fed raises rates to cool off an overheating economy and to fight inflation.

At the present time we have neither (although some would argue that inflation is in fact a problem) but even after the stabilization of the economy post-financial crisis, the Fed has decided that no time was the right time to begin normalizing interest rates!

And even now they are hesitating to raise rates 1/4% to 1/4%.

The phrase between a rock and a hard place definitely seems to ring true here!