Does it matter if Fed raises a key rate 1/4 of 1%?

fed funds chart_0Source: Zero Hedge.

The Open Market Committee of the Federal Reserve System has raised a key interest rate from a quarter of a percentage point to half a percentage point.

Many economists and writers fear this may sink the economic recovery.  I say that if such a minute change will sink the recovery, the recovery was leaky to begin with.

The interest rate is the Fed Funds target rate, the interest rate at which banks lend money to each other overnight in order to have the minimum reserve funds required by the Federal Reserve System.

One of the goals of the Federal Reserve System is to strike a balance between unemployment and inflation by regulating interest rates and the supply of money.

The idea is that when interest rates are low, people borrow more money to spend and investment, resulting in more jobs but also inflation and price increases.  When interest rates are high, the reverse supposedly happens.

But key interest rates have been at nearly zero (or below zero according to some measures), and the economy hasn’t responded.  The increase in jobs is much less than in previous economic recoveries, while inflation continues low.

I was one of those in years past who criticized the Federal Reserve Board members for being too quick to choke off economic recovery.  They saw rising wages and lower unemployment as a threat of inflation, which for a banker is the worst thing there is.

But that’s yesterday’s news.  I don’t see how interest rates changes in the range the Fed is talking about can choke off anything.

I think the United States needs fundamental economic reform, including the breakup of monopolies, the reform of corporate governance, an overhaul of the banking system, a rejection of pro-corporate “free trade” agreements, prosecution of corporate criminals, stronger labor unions and cooperatives, and investment in education, research and infrastructure, to start with.

Attempts by bankers to move certain key economic indicators aren’t enough.

Reliance on monetary stimulus is highly attractive because it promises prosperity for all without threatening any vested interests.  But the stimulus only works if the economy is healthy to begin with.

LINKS

Fed interest rate hike: First time in a decade by Ben White and Jon Prior for POLITICO.

Fed Hikes Rates, Unleashing First Tightening Cycle in 11 Years by Tyler Durden for Zero Hedge.

Fed Increase Is the Most Important Thing Ever.  Oh, Wait by Barry Ritholtz for Bloomberg View.

The “American Dream” Is Over – And Voters Know It by Charles Hugh Smith for The Daily Reckoning.

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One Response to “Does it matter if Fed raises a key rate 1/4 of 1%?”

  1. Holden Says:

    I think you’re right. Until the US Government steps in and breaks up some of the monopolies and oligopolies, I don’t see how we’re going to really see any new economic growth. Only new competition and shifts in the market will do that and a monopoly/oligopoly has no interest in changing a thing.

    The current Fed rates appear to simply be keeping the air from leaking out of our life boat at the moment.

    Consider this- we have a leveling off of population growth (meaning less natural growth and demand), we appear to be trying to choke off immigration (less migration growth), most of our industry has become consolidated and mature (i.e. the monopolies and oligopolies), and our government seems hell bent on destroying the trust and credibility of our bustling technology industry (e.g. the CISA bill, mandatory backdoors to break encryption, NSA spying…).

    It’s a miracle our economy is doing as well as it is at all. The rest of the world must really be struggling…

    Like

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