Neutral Interest Rates

Fed Chairman Jerome Powell made some very interesting remarks where he said he thought that interest rates were “just below” neutral.

This is bizarre on many levels.

First and foremost, neutral interest rates are perfect interest rates unless your economy is in a recession in which case you want stimulating interest rates, or if you are trying to control inflation in which case you want interest rates that have a constricting effect on the economy to stop price increases. So, if interest rates were close to neutral, and inflation was not increasing, then wouldn’t you want to keep interest rates at neutral?

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But, Powell and the rest of the Fed have been telegraphing a December rate increase as loudly as possible. In other words, event though interest rates are “just below” neutral, Powell and company want to raise them. Why?

Economy is Teetering

on the edge

The other weird bit is that everyone can see the economy is slowing down, and quickly.

Housing starts are way down. Housing sales are decreasing. Both are very much affected by higher rates.

The stock market is falling, having erased the whole year’s gains. Also, in very large part due to rising rates and their affects on customer spending and corporate profits.

Then, for added fun, the automotive industry has begun announcing big layoffs, and major plan closures. Why? Falling car sales. Anyone want to guess what makes it tough to sell a product that most buyer depend on a loan to purchase? Rising rates!

So, in other words, all of the signs point to interest rates having a negative, or constricting affect on just about every part of the economy that is sensitive to interest rates. How in the world can that possibly be construed as “neutral”.

Fed Going to Start the Recession

I’ve gotten closer and closer to saying it over the last few months, without actually saying it, because predicting things isn’t really what I do, but now I’m going to say it.

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The Fed will cause the next recession with its compulsive interest rate increases. If the December rate increase doesn’t do it, one of the ones next year will. The time for the Fed to pull back and be cautious is now. No one is sure if the inflation is real, but everyone can see that the coming slowdown is real. In that case, the prudent thing is to wait and see, but the Fed doesn’t want to wait and see, it wants to be “hawkish,” and so it will over-raise rates, and dunk the economy.

If they don’t change course, the only thing we can hope for is that the recession is light.

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