The Fed raises the interest rate
The Fed has announced a raise in the interest rate for the first time since 2006.
The new target will go from 0 percent to 0.25 percent to 0.25 percent to 0.5 percent. Most members expect the new rate to coalesce around .375 percent before the next hike, according to a chart showing individual member expectations.
The decision, given the official stamp of approval from the Federal Open Market Committee, marks the first increase since the panel pushed the key rate to 5.25 percent on June 29, 2006…
…[T]he FOMC took the rate to zero exactly seven years ago, on Dec. 16, 2008.
And well do I remember it. That 5.25 percent seems like a fairy tale, doesn’t it? Now an average of .375 percent is big news.
“The premise behind today’s rate hike to me feels a little stagflationary. They didn’t raise rates today because real growth got a lot strong. In fact, if anything it got weaker, but they raised them anyway,” said Jim Paulsen, chief market strategist at Wells Capital Management, following the decision. “If we go through 2016 where real growth doesn’t pick up but wage and price pressures do because we’re in full employment, that’s stagflationary.”
Despite the history-making move, the road back to normalcy will be a long one. FOMC officials made it excessively clear in post-meeting documents that the pace of increases will be gradual and dependent on the quality of economic data.
It’s already been a long one.
It is mathematically impossible for a return to normalcy. The road to fiscal probity has a huge canyon of debt across it. The sovereign bankruptcy of the West is mathematically inescapable. The result will be starvation, third world poverty taking up residence within the industrialized nations and a concomitant tyranny. We are almost out of road down which to kick the can of fiscal consequence.
And they’re going to start this during a presidential election? From where I’m sitting I detect a fairly strong odor of bovine fecal matter.
KRB
G.B. is correct, IMHO. The trivial rate rise is an exercise in frivolous stupidity, a preposterous charade: We will get back to “normalcy”, Yes we will, Just you watch. Janet will make it happen. We have to believe!
The new normal, however, is in reality where we are. Growth is no longer achievable. Every economy on the planet has shot its growth wad, so to speak. We cannot grow ourselves out of this incredibly deep hole of debt. A service economy cannot be grown by everyone serving everyone else. You have to make stuff, to add value, in order to grow an economy.
The proportion of the Federal “Budget” payable as interest on Federal debt in the event of historically normal rates would dwarf that of Defense. The resulting interest payments would be monstrously huge. Taxes would necessarily rise. Thus, end of recovery, even if one were otherwise possible.
The Fed hopes and thinks it can manage our way out of this hole with managed inflation.That is delusional.
There are two variables in our economic equation: Monetary; and Fiscal. The monetary (the Fed controls) is dwarfed by the fiscal, which is in the hands of the Progressives. When you look at Obama, think Mugabe, and you’ll get a glimpse of the future.
Excellent discussion of the issues, Frog. The whole world is drowning in debt and an excess of things. There is no shortage of anything – food, petroleum supplies, manufactured goods, houses, etc., etc. We aren’t in inflation because inflation is created by too many dollars chasing after too few necessities of life. We have many dollars (mostly in the banks) but no shortages of anything. That’s why the QE program did nothing to rev up growth or production. It is like pushing on a string. Every major economy (Europe, Japan, China, India) outside the U.S. is holding interest rates low and printing money in an attempt to juice growth. Just as the Fed had done for the last ten years. So, the Fed is going contra to the flow of all other central banks.
Higher interest rates here will do three major things – raise the value of the dollar making the U.S. less competitive, cut production of our manufactured goods, and reduce the number of mortgage formations (slowing the housing market). That will lead to bigger government debt, more unemployment, and more economic angst but maybe not a major crash………..yet. It could be a gift to the GOP, By election time people may really want change toward pro-business policies.
I have read some economic gurus who believe the only way out for the U.S is an outright devaluation. That would mean we would wake up one morning and learn that the value of our dollars had been reduced by some percentage (say 15%) overnight. We would all be poorer (at least in purchasing of foreign goods), but it could set the country up to be more competitive on the world markets. A gamble that might work. We’re not there yet.
We are in uncharted waters as far as modern economics goes, but some pundits have likened what is happening to the days of John Law and the Mississippi Bubble of 1718-1720. The search for sound money and honest government goes on. Human nature makes that search very difficult and possibly never ending.
I sadly have to agree with what has been written here. Very difficult to see a way out.
In the mean time, I feel so bad for those folks who were responsible; who saved for their elder years; and now have no place to turn for income on their savings. Since the upper level for interest rates must remain low in order to service the public debt, I expect that we will see even greater reliance on government to reduce the suffering; and, of course, ever greater public debt.
In aviation, there is a phenomenon called the “grave yard spiral” (fortunately, rare). Generally, people may envision a flushed toilet. There is little likelihood of coming back from either.
The reason I love this blog is because neo always asks the right questions, and the commenters always (well, usually) have the right answers. G.B. is correct that this mess the central bank has created is mathematically insolvable. To answer Kae Arby, the reason they’re doing this now is because the new Republican president (to be known in the future as “Hoover” Cruz) will get the blame for the inevitable collapse. Anyone here who thinks the Fed is apolitical please raise your hand…
Oldflyer writes: “In aviation, there is a phenomenon called the “grave yard spiral”. Yes, the pilot sees his altimeter winding down so he instinctively pulls back on the stick, which only makes the problem worse. Great analogy! The only way out is to “straighten up and fly right”, but I think it’s too late for that…
What needs mentioning here is the global demographic crash.
Populations are slowly but surely cratering in ALL productive parts of the globe. Dries up demand, doncha know!
I would only add that Obama would be agreeable to a fiscal collapse under a Pres. Hillary as much as under a Republican Pres… either way, it’s a win-win for Obama.
Nine comments in 24 hours is telling. Most people do not know or care to know what’s going on, despite the fact this economic stuff will harm them more than anything else going on anywhere on the entire planet.
I heard today on news radio that there is some idea here that Yellen will slowly raise interest rates over the year in order to be able to lower them again by the end of the year. In other words, our economic problems are not solved, she knows it, but you can’t go further than ZERO (unless she could somehow convince us to go negative, for which I think she’d have a pretty awful reaction). If you can’t go further than zero, you must build up that interest rate to some degree, if you see bad economic situation on the horizon (further stagnation) and need something to ‘fix’ it.
I am starting to believe this may be the case.
One of my favorite economic gurus is Maxed Out Mama. She doesn’t post as much as she used to but when she does it is well worth taking note. Here’s what she had to say on 12/10/15:
http://maxedoutmama.blogspot.com/2015/12/its-august-2007-in-recession-terms-that.html
My investment stance is in anticipation of a recession, which will come sooner and be deeper because of the Fed.
Frog,
Most people have zero understanding of the dilemma we all face either as nations or as individuals. This has been looming on the event horizon for decades. The elite think they can ride out the storm. They are in for a big surprise.
BTW, its not too late to move to the midwest, learn to grow and preserve food, and how to hunt. The welcome mat is on the front porch. 😉