Dear Fed—Please Don’t Raise Interest Rates Again!

Popular Economics Weekly

The Federal Reserve FOMC meeting this week is expected to conclude with another 0.25 percent rate hike; but it’s happening at the wrong time.  This is the rate that controls credit card interest and the Prime Lending Rate that banks use on short term loans.

Few follow the trajectory of the so-called Treasury yield curve which graphs the difference between short and long term interest rates. The curve is flattening at present—not a good sign for future growth. Instead, it’s historically a sign of slowing growth.

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Graph: FRED

Why? Short term rates are the cost of money to banks, and longer term interest rates are what they earn on loans. When the difference narrows, bank profits plunge and they lend less to businesses, which shrinks available credit.

Now is not the time to be shrinking the credit, when we are in the ninth year of this very long-toothed recovery. Especially when the new Republican tax reform bill would increase taxes for anyone earning less than $70,000 per year by 2027, according to the CBO, non-partisan The Tax Policy Center and Joint Committee on Taxation—and this is most of us; more than 80 percent of consumers earning wages and salaries rather than ‘rents’ (i.e. passive income from investments).

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Graph: TPC

The Fed’s Board of Governors must be focusing on the proposed corporate tax rate cut from 35 to 20 percent, which the Fed predicts will flood the markets with more cheap cash, thus raising the specter of inflation.

But what inflation? The 10-year Treasury is yielding less than 2.4 percent today, as it has been for at least the last three years; still a record low. And that means bond traders see no inflation is even on the horizon, since bond holders look at least 6 months’ ahead for any inflation tendencies. In fact, Fed Chair Janet Yellen said recently she is more worried about disinflation, because they haven’t been able to goose the inflation rate above 2 percent since the end of the Great Recession, when it has been 3 to 4 percent when growth rates were at historical averages.

The Personal Consumption Expenditure Index (PCI) is the Fed’s preferred inflation indicator and still too low to increase demand. It came in at 1.4 percent in October, which is a sign of insufficient demand, even though corporations already are hoarding more than $4 trillion in excess cash and liquid investments.

The culprit is incomes of the 80 percent wage earners. Their average incomes have remained at $37,000 per year for decades with inflation factored in; which means they will continue to shop for bargains. That won’t push prices or inflation any higher.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Keynesian economics, Politics, Weekly Financial News and tagged , , , . Bookmark the permalink.

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