Tuesday, December 22, 2015

Fed Raising Rates

Looks like the Fed is raising rates, and this WSJ article goes through winners and losers. There's another way to think about it though.

Firstly, orthodox macro has lower rates as simulative because it encourages borrowing, which comes concomitantly with spending. However, when you are in a balance sheet recession, with an overly leveraged economy, then this additional borrowing doesn't happen, which has been the story in the US since 2008 and in Japan since about 1985.

More specifically, the leveraged stimulant that lower rates drive comes essentially from residential housing and the mortgage market. Prices remain high on the coasts, and people have all the house they need elsewhere. With a weak labor market, stagnant wages, and generally poor business demand, I don't think households are ready to leverage up or have the cash to go long(er) housing.

Secondly, on the flip side, higher interest rates mean more interest income, and income is what remains missing in this economy. 0.25% isn't much, but it's better than ZIRP, and while I see this as being too small to have much of an impact, it is (mildly) simulative.

More broadly, as Mosler points out, the Fed should really leave interest rates at zero permanently. There's no purpose to them, it would take all the profit out of the bond speculation market, and most importantly, it would focus stimulus on the channel which is actually capable of delivering it -- fiscal.


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