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The Real Reason the Fed Has To Raise Rates in June
By EconMatters
FOMC Debate on Rate Hikes
There is a lot of debate about what the Fed is going to say regarding rates next Wednesday at the FOMC Meeting. Will they change the language, will they signal rate hikes, etc. but pundits haven`t really addressed the main reason the Fed has to raise rates in June.
Consider the Alternative
The real reason is to consider the alternative, that they wait and raise rates at the next major quarterly Fed Meeting in September. If we assume the same continuous trends regarding employment, GDP, retail spending etc. that we have been producing for the last 12 months, then things are going to get real uncomfortable for the Fed and markets come the September FOMC Meeting. For example, the unemployment rate may be close to 5.2% or lower in September, wage inflation and the core inflation readings have been ticking higher. Both measures will only escalate if the current economic trends of small business and consumer optimism continue their current pace, and the gasoline stimulus starts pushing through for consumers from their bank accounts out into the broader discretionary spending landscape.
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When Everyone including Financial Markets Realize that the Fed is behind the curve
This could cause the Fed and the markets to realize in retrospect that they are well behind the curve, and the dreaded 50 basis point rate hike comes in September, followed by another 50 basis point rate hike the following month. The turmoil in markets would be considerable to say the least and cause a severe asset reallocation in markets all at once. Those of you who wish for a delayed rate hike, only like that alternative if the Fed never raises rates, which is highly unlikely given the performance of the economy and its current pace of trending growth.
The Trade-off
Therefore if rates are going up even the most dovish market participants want the Fed to raise in June by 25 basis points, and slowly ease into the rate hiking cycle. Sure there will be some market turmoil, but market turmoil is inevitable given ZIRP for 7 years, there is no getting around this, and the Fed knows this fact. What these same dovish participants don`t want is a 50 basis point rate hike in September because the Fed waited way too long when it was obvious they should start raising rates in June. The Fed doesn`t want to cause this kind of market volatility. The tradeoff is a no-brainer, take a little pain now for markets, or a whole bunch of pain by waiting until September.
The September option risks the possibility that everyone knows it is too late to raise rates by slowly getting into the rate hiking cycle with a measly 25 basis point rate hike. That isn`t going to cut it in September with a 5% unemployment reading and a 25 basis point Fed Funds Rate. History and economic theory has proven this is disastrous to say the least.
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You Might Not Want What You Think You Want Financial Markets
Consequently the doves who think they want to delay raising rates by a mere 25 basis points, should consider what they are really asking for, a Rate Hiking Tradeoff. The Tradeoff is as follows:
- 25 basis points in June and another 25 basis points in September, followed by additional rate hikes as the economy performs,
versus
- no rate hikes in June but a 50 basis point rate hike in September, probably followed by an additional 50 basis point rate hike the following Regular Fed Meeting as the economy and the economic data move well past the Fed`s own forecasts for the Unemployment Rate, GDP Growth Rates, Core Inflation, and Consumer Spending.
In essence it becomes abundantly clear they should have raised rates in June and now realize they need to play catch up in regards to the rate hiking schedule.
Everything Has a Cost
This is the Tradeoff that financial markets and the Fed need to consider because nothing is free in this world, everything has a cost. The Fed`s main job is price and market stability, and the most logical course of action is to ease into the rate hiking cycle a little bit at a time with a 25 basis point rate hike in June that is well telegraphed to financial markets. If rate hikes are a given, and most market participants deep down will admit to this when push comes to shove, then if they really think about the alternatives of how the rate cycle plays out, they should actually encourage the Fed to raise rates 25 basis points in June in a well telegraphed manner.
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Which Rate Hiking Option Creates the Most Market Turmoil and Instability?
What they actually don`t want is the other option which will cause them a lot of pain that they will regret like a binge drinking alcoholic thrown into a rehab clinic cold turkey straight out of the neighborhood bar.
Financial markets should actually be begging the Fed for a June 25 basis point rate hike, the alternative is going to cost them a lot more money and a shock to their massive, poorly positioned portfolio of assets in this ZIRP Fantasy Land. Hopefully there are some rational members of the Federal Reserve, two such members have already voiced some rational thought regarding hiking rates in June, and we will see if more prudence prevails with the rest of the Fed members meeting next week. The alternative to not raising rates in June is just too dangerous for the Fed and financial markets.
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Remember, the only rate the FED can hike without falling into a negative cash flow is 1%.
Suppose the FED just raises rates by a window dressing number of 1/10% in June. Right headline with little change. Look to Sept for the 1/4% raise, if then. Rate differential between positive US rates and negative rest of developed world is going to have some unknown outcomes. Don't get too certain about outcomes.
I'll go with the historic .25%. They seem to be right on the money. As for the dirivatives, Dodd-Frank rules; the speculators (not the banks) will be taking the fall.
The FED is not concerned with debt, why not double it to $36 Trilion?
It's all funny money to them, and they are controlled by the banks, who profit from FED gravy via carry trades, stock pumping, and default swaps and MBS's.
They don't care, they will blow this until it pops; then bailout all over again and lather, rinse, repeat.
Who is to stop them? Certainly not the somnolent sheeple of the U.S.A. and the E.U.
Debt only matters to the extent that it can be serviced. They need a 4% nominal growth rate to maintain the debt. Ideally, they want 3% growth and 1% inflation. If they can't get that they just reverse it, 1% growth and 3% inflation. Raising interest rates will have the effect of slowing the velocity of money even more decreasing inflation and give deflation a good push which means default if it really takes hold. We are already flirting with core deflation.
This is just one aspect amongst many but the bottom line is that it's unlikely the FED will raise rates any time soon. A tiny rate hike for show may be in the works though but I doubt that.
FRB will not raise rates in June.
If every one else cuts rates and the US holds steady, they will say it was the equilvalent of an increase....
Article was utter bs using "their' statistics and projections. When was the last time either of those was accurate?
They may raise rates but only enough to cause a little screaming and then NIRP and QE4EVA here we come. If you think Japan's PPT has been busy, wait until the FR and US PPT get rolling (and publicly acknowledged). This isn't going to end or get better until THEY can buy EVERYTHING with fake paper promises that YOU will be responsible for paying THEM back, plus fees.
HSBC Closing 7 Gold Vaults in London...anyone know about this?
mental note...never click on the econmatters website
+ Never read an econmatters article.
At some point all Liars get caught.. reality is really going to Suck, for some people
This article is retarded. Why would the fed be forced to raise rates? What's stopping them from holding rates at zero for another 6 years?
As long as the other banks cooperate and take their turn, not a helluva lot except it works until it doesn't.
Interesting thing. The bank is buying up government debt (around the world CBs are acting on behalf of 'the bank'). The bank is also buying up stock (same deal). Rates are low and liquidity is draining (up=down, no?). It would seem that they have manufactured a system where they can run a firehose and drain the swamp at the same time. They have a lot of hands to keep the plates spinning. Do they have too many hands for the brain to control?
I'm positive I witnessed one of these Fed Stress Tests in progress today at my local branch:
Fed Auditor: Do you give your depositors a hard time when they try to withdraw cash?
Bank Rep: Well...no not really.
Fed Auditor: FAILED!
Suck it up, folks, you've got no other choice.
Don't like the Fed? Tough.
GOLD / SILVER are other choices AmerikanPatriot
The US Dollar, along with the US Economy, is DEAD.
ECON MATTERS - FUCK YOUR HORSESHIT "analysis".
Does raising rates by .25% actually count?
I know a load of "Croc" when I read it; I'm the expert.
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Who let the CNN "Cartoon News Network" reporter in; fair & balanced??
Haha. Good one.
the white haired smelly bitch, cunt, whore can never and will never raise rates.
instead of looking forward to this fictional event, you are better off holding your hip, hip, hoorays for when this rapid mongrel dies.
the filthy lying bitch is nearing her end. and when it happens, i am going to fucking celebrate for a week straight. already got the t-shirts printed and party hats on order.
I hear satan is sharpening his prick in a very special way for this dirty cunt.
You seem to imply that she is evil and yet you also suggest she is stupid. Which is it? If she is evil do you not fear underestimating her (or her owner(s))? If she is stupid do you not fear underestimating the damage she will do to you and yours?
We all know she is a pawn that deserves derision but not THE one who deserves our attention.
You are obviously part of Satan's family, for out of one's mouth speaks the heart. Better think about that seriously. Just sayin'
-Ephesians 5:4 if you want to know what your Creator has to say; He does have the last word.
Crazy.
People still think their is momentum in this economy?
1. To play the "confidence" game, like rigging the S&P so all is well please spend and buy more stocks.
2. After 6 years of "recovery" you look pretty silly with rates at 0
3. You cannot lower rates if you are already at 0 when the next official recession is there (sooner then you think)
4. After spending trillions of dollars the FED cannot admit that did not work out for the real economy.
It will be great fun to see the yieldcurve go flat or negative after the first rate rise "what youre gonna do ghostbusters"
the gas price benefit is all but over. gas up $1.o6 per gallon in one month . southern calif.
The writer of this article is either on crack or has his head up Janet Yellen's. The five largest US banks alone have a total position of $191 trillion dollars in interest rate derivatives that will implode at the first actual rate increase and not only bring down the banks but along with them the financial system and the Fed itself. That's well over eleven years of GDP going bad. What are you going to say when they ask the public to bail them out of that fuck-up?
Not only that, raising rates will further strengthen the dollar which will have detrimental effect on profits of multinational corporations, as well as the ability of emerging markets to service US dollar based debt. US exports will suffer, and US labor costs will rise, causing more off shoring of jobs. Oh, and then there is the problem of the $18 Trillion national debt. A rise in rates will add 100's of billions to the deficit further ballooning the national debt. As I have said before, the probability of further QE by the Fed is far greater than the probability of any rate hike.
And how is that the Fed's problem?
Sorry but I don't see the swap lines being opened this go around. The war on "the Taliban" appears to have been a mere warm up.
We've gone bankrupt just fighting them. Now its Russia, Venezuela, Iran, "the terrorists", Missouri...list is getting pretty long here...
in caps due to the redunkulousness: cant and wont happen, fed be fucked by their own actions...so i introduced my wife to cocaine over the years, time to get her off of it as her health might be compromised...yeah RIGHT?
egad
I have never read such a load of crap in my entire life.......other than what I read about the markets on a daily basis.
Someone has been drinking the koolaid.
Well clearly the dollar, commodities, out of control deficits, tax collections, inflation, perpetual bailouts....
I mean CLEARLY...
Except for deficits, tax collections and bailouts, they shouldn't be controlled.
yea...they try anyway...
and fool us continuously...
all smoke and mirror, mind control stuff.
I'm going to stop reading the articles at the top of the page. (Except Billy Banzi Seven of course)
Cognitive Dissonance has some good articles too.
Otherwise, yes, these articles at the top of the page are mainly good to read for the commentary.
For the most part, commentaries are the best part on ZH and other blogs.
Ah Haa! Exclaims Nobody as he leaps out from behind the pillar brandishing his sword. But the Fed, you zee, is hoisted on it's own petard! For the Fed, you zee, must use it's own seasonally adjusted, make-the-president-look-good numbers, which insist that unemployment is in the fives, and inflation is beginning to heat up. Prince Yellen demands the tighten, alas, because the JOLT numbers require it (and all the TBTFs are short...), so tighten, tighten, tighten - it will all work out and the masses will be happy.
The banks are fat and happy with free reserves upon which the the FED pays interest. The real economy be damned.
Let's see. Unemployment is well into the double digits. Prices are falling like a rock. The RE market is now rolling over and going down. This represents the real economy, not the delusion that most of the article is. The Fed is behind the curve all right, behind the curve in providing more stimulus towards an otherwise comatose economy. Raising policy rates at this point would be inviting of a disaster.
Prices are going nowhere from where I sit. And the RE market in my area is hotter and almost as expensive as it was pre-crash. Not seeing any of this shit you speak of.
some of the shit show is real., ha. rates have to be raised for the continued illusion to go on...
That's exactly right. On the other hand if they don't raise rates - its telling even the dim-witted that the numbers on employment and GDP are fantastic lies. If those are lies, maybe I better not get a loan for a new car or take a trip on the July 4'th holiday. They're trapped in their own narrative. In the hacked version of Sim City they're running the simulation on we're in a recovery. They know that's not true of course - but if they admit it then: 1) The last 7 years of extraordinary monetary policy have been a failure of biblical proportions, and 2) they won't be able to fool us into charging up our credit cards to buy new i-whatevers.
"If we assume the same continuous trends regarding employment, GDP, retail spending etc. that we have been producing for the last 12 months,"...
....then we are idiots.
raise rates - ya - just like Syriza said they won't accept any more Troika bailout programme - hahahahaha!!!!