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Raising The Federal Funds Rate Is A Good Thing?

June 16, 2017
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We all “know” there is a correlation between economic growth and the federal funds rate. This week the Fed raised their federal funds rate a quarter point.

It seems very logical that an economy driven by credit could be slowed and accelerated by using interest rates. When viewing credit’s relationship to GDP (see graph below), this relationship worked fairly well until the Great Recession.

Even offering significant reduced rates for consumer borrowing, it has not induced the consumer to borrow at a higher than the historical norm since the Great Recession.

Of course the federal funds rate used in the graphs above are not the rates the consumer or business borrows. But even so, the credit borrowing rates most of us see are low historically – but still did not induce a spending frenzy.

Business requires a return on investment, and obviously business is not seeing a potential of much return, reflected in weak response to the historically low rates of the past several years.

Economist Warren Mosler posted last week:

Looks like another rate hike coming from the Fed next week.

Seems to me the Fed models (not mine) tell them rates work through the credit channels, the idea being a rate hike will slow down credit growth and thereby keep the economy from overheating, etc.

But with credit growth as it is per the above charts, seems they are already decelerating. [some of the charts Warren Mosler showed that are showing declining growth are real estate loansconsumer loanscommercial and industrial loans]

So what would be the point of a rate hike?

To make credit growth decelerate even faster?

My position is most consumers or business do not spend money for items not needed – even with low interest rates. Demand for credit is low.

The consumer largest monthly outlay (housing) is being squeezed with rising costs for having a place to sleep.

It is hard to argue that the low interest rates were doing much good – the data does not support the concept that the ultra low interest rates were influencing economic growth. Is the consumer tapped out and credit is no longer a prime driver for consumer spending? It may not matter in the current environment what the interest rates are – as long as they are not too high.

Other Economic News this Week:

The Econintersect Economic Index for June 2017 continues to forecast normal growth for the second month in a row. Six-month employment growth forecast indicates modest improvement in the rate of growth.

Bankruptcies this Week from bankruptcydata.com: Gymboree, CST Industries, Soupman, GenOn Energy (f/k/a RRI Energy), CGG Holding

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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