The Fed Can’t Raise Rates, But Must Pretend It Will

Tyler Durden's picture

Submitted by Thorsten Polleit via The Mises Institute,

Waiting for Godot is a play written by the Irish novelist Samuel B. Beckett in the late 1940s in which two characters, Vladimir and Estragon, keep waiting endlessly and in vain for the coming of someone named Godot. The storyline bears some resemblance to the Federal Reserve’s talk about raising interest rates.

Since spring 2013, the Fed has been playing with the idea of raising rates, which it had suppressed to basically zero percent in December 2008. So far, however, it has not taken any action. Upon closer inspection, the reason is obvious. With its policy of extremely low interest rates, the Fed is fueling an artificial economic expansion and inflating asset prices.

Selected US Interest Rates in Percent

Selected US Interest Rates in Percent
Source: Thomson Financial

Raising short-term rates would be like taking away the punch bowl just as the party gets going. As rates rise, the economy’s production and employment structure couldn’t be upheld. Neither could inflated bond, equity, and housing prices. If the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble.

This is the reason why the Fed would like to keep rates at the current suppressed levels. A delicate obstacle to such a policy remains, though: If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.

To prevent this from happening, the Fed must achieve two things.

First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.

 

Second, the Fed must succeed in continuing to postpone rate hikes into the future without breaking peoples’ expectation that rates will rise at some point. It has to send out the message that rates will be increased at, say, the forthcoming FOMC meeting. But, as the meeting approaches, the Fed would have to repeat its trickery, pushing the possible date for a rate hike still further out.

If the Fed gets away with this “Waiting for Godot” strategy, savings will keep flowing into credit markets. Borrowers can refinance their maturing debt with new loans and also increase total borrowing at suppressed interest rates. The economy’s debt load can continue to build up, with the day of reckoning being postponed for yet again.

However, there is the famous saying: “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.” What if savers and investors eventually become aware that the Fed will not bring interest rates back to “normal” but keep them at basically zero, or even push them into negative territory?

If a rush for the credit market exit would set in, it would be upon the Fed to fill debtors’ funding gap in order to prevent the fiat system from collapsing. The central bank would have to monetize outstanding and newly originated debt on a grand scale, sending downward the purchasing power of the US dollar — and with it many other fiat currencies around the world.

The “Waiting for Godot” strategy does not rule out that the Fed might, at some stage, nudge upward short-term borrowing costs. However, any rate action should be minor and rather short-lived (like they were in Japan), and it wouldn’t bring interest rates back to “normal.” The underlying logic of the fiat money system simply wouldn’t admit it.

Selected Japanese Interest Rates in Percent

Selected Japanese Interest Rates in Percent
Source: Thomson Financial

The Fed - and basically all central banks around the world - are unlikely to accept deflation clearing out the debt, which would topple the economic and political structures built upon it. Fending off an approaching recession-depression with more credit-created fiat money and extremely low, perhaps even negative, interest rates is what one can expect them to do.

Murray N. Rothbard put it succinctly: “We can look forward... not precisely to a 1929-type depression, but to an inflationary depression of massive proportions.”

 

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JustObserving's picture

The Fed has been pretending that a rate hike is coming since 2011.  All pretense, no action.

The dollar must be kept strong and gold weak with talk of an imminent Fed rate hike.

No rate normalization during my lifetime Bernanke

clooney_art's picture

 

Just like how we pretend to have a great economy going. We pretend to be a democracy. We pretend to spread freedom. We pretend to have a free press. We pretend to have 2 parties.

CrazyCooter's picture

The Fed can't raise rates. That is why that TALK about it incessantly ... because they aren't going to do it.

Mr. Market on the other hand is going to raise rates one of these days, and the Fed will get drug along kicking and screaming.

Regards,

Cooter

SWRichmond's picture

Once the rush into gold begins it cannot be stopped.  Everyone knows gold is manipulated, just as everyone knows that the rest of the markets are manipulated.  Everyone knows gold will be smacked down hard by manipulation as well as by an actual rate hike in the event a rate hike were to occur.  This is a mechanism for keeping gold suppressed.

The simple fact that a cabal can set the price of money is evidence enough that everything else is manipulated, as everything else is priced in manipulated "money" units.

They can't raise rates but they must talk incessantly about it.  Jawbone of an ass, as it were.

A Nanny Moose's picture

Only MSM seriously talks about the Fed raising rates as if it might actually happen. For everybody else, I simply show them a chart of interest rates for the last 30 years, and GDP with debt subtracted.

Boris Alatovkrap's picture

Boris is previously watch with deep breath to see if Central Bankster is actually raise rate, but is run out of popcorn.

Son of Loki's picture

PMs and oil are so underpriced they will eventually go parabolic. Houses are still pretty overpriced 2-4 times normal so I do not think they will move up much higher.

Boris Alatovkrap's picture

Federal Reserve (or any Central Bankster member of Cartel) is cannot raise rate, but must is to speak of incesantly. This is upkeep of charade and is to be expecting. However, that is not for saying interest rate is not rise. You are only look at decouple of credit card and consumer loan rate from rate of bond to see this is phenomenom. This is inverse kinematic movement of fiat market, stop one thing from move, but other is move instead... until either Federal Reserve (or any Central Bank Cartel) is force move, or is demolish fiat status. Is just take time, so you are patient, no?

... but what is Boris know!?

El Oregonian's picture

It makes perfect sense. Pretend Feds printing pretend money.

DeadFred's picture

"Early is the same as wrong" old Vulcan stock market adage  This article is as useful as saying there will be a big earthquake in California, but not when.

CrazyCooter's picture

Only if your trading. The other option is to take your toys (cash) and go home (and stuff it under the matress).

Regards,

Cooter

herkomilchen's picture

This is a losing strategy as well.  The cash rapidly degrades in value, so they get you that way.  Assets are all way overpriced so not an option.  Physical gold is better, but you'll have to wait until their manipulations give out, which may not be for a very long time.  So long as everyone in the economy insists on using dollars, there is no escape from the long arm of the Fed.

Pareto's picture

What if they said tomorrow - for sure - absolutely.  Does that change your assertion?  "Early is the same as wrong", therefore, "this aticle is as useful as saying there will be a big earthquake in California, but, not when."  Seriously?  How fucking arrogant and retarded do you have to be to say something like that?

Whenever i hear or read shit like that, I recognize that its a question that can never be answered and so therefore, the question itself, while appearing to provide some cache to the person asking it, is really only demonstrating their profound insatiable intolerance for not having shit - like the meaning of life - spoon fed to them.

Pumpkin's picture

No rate normalization during my lifetime Bernanke

 

Then die fucker!

Bangin7GramRocks's picture

"We are like totally raising rates, like super soon and stuff. Like for realz. I'm like totes serious." - Janet Yellen

XAU XAG's picture

Cheques in the post.....................and all that

SheepDog-One's picture

'We're super serially raising rates any minute!'...lol the ShitShow slouches on into yet another week.

GMadScientist's picture

Beckett is too heavy for Murkins to relate, you need something they can sink their feeble remaining teeth into, like Lucy from Peanuts fucking with Charlie Brown.

Reaper's picture

The god of Central Banks is dead. The priestly bankers have hid his body, while continuing on his worship services.

chart_gazer's picture

Take a good look at that Japanese chart. Exactly what USSA will look like. We are at about their 1998. We will have ZIRP and NIRP for 15 more years at least.

Uchtdorf's picture

Nah, "the centre cannot hold" that much longer. (with apologies to Yeats)

messymerry's picture

Yeats!  Isn't that something you say when you are barefoot and step on a sticker? 

I'll eat my tinfoil hat if we make it to '17...

;-D  

knukles's picture

The center is already gone.  Shit unraveled long time ago.  Just most folks don't know, care or are pretending otherwise.  Or just don't know what to do about it.

herkomilchen's picture

I'm sensing about a 70/30 split across ZHers.  Majority predicts QE4+ and continued asset inflation with whatever-it-takes printing.  Minority predicts market forced rate rise and/or stock market collapse atop collapsing fundamentals.

It would be great to have a sticky post lining up and summarizing each of the arguments on either side of this great divide and updating them weekly.

CrazyCooter's picture

Nope. Japan did it when there was a lot of economic activity elsewhere (globally speaking). The thing that is different is everyone is trying to do it at the same time and things are (globally speaking) going into the shitter.

Saudi used to be a huge dollar sink and they are now net sellers. Same with China. ZH covered this a while back (and continues to do updates) and this is what is really different this time. Those treasuries have to get sucked up by SOMEBODY and there are more and more coming into the supply side of the equation as the days go by (don't forget new/rolling issues).

And that ever increasing supply is precisely how Mr Market is going to raise rates.

Regards,

Cooter

chart_gazer's picture

The primary dealers have have $2.5T reserves sitting at the fed earning interest (stealing money from the people). That'a the reminence from QE that hasn't worked its way into the economy because there is no demand for it (you know, that velocity of money mumble). I believe its been intentionally left there to 1.) buy the stock market when its starts to crash 2.) buy bonds when others start to dump. And don't forget the fed has never stopped monetizing the new debt, they just keep rolling over debt that expires. There is ample demand for tresuries and if there isn't fed will start QE4.  Remember what Obumer said on 60 minutes, his last year he will make sure "the GOP doesn't derail the economy". To him, the economy is the stock market and he/fed/citadel and all other annointed surogates will manipulate/rig through every means possible to keep things propped.  NEVER think they are out of ways to do things, this is the most corrupt admin of all time.  Rate increases will slow everything down. NIRP and QE4 coming before interest rate increases.

Panafrican Funktron Robot's picture

"And that ever increasing supply is precisely how Mr Market is going to raise rates."

Or, planned stock market crash = everybody "escapes" to USTs.  Or, QE4.

Either way, engineered.  Mr. Market got stabbed in the face a while back.   

herkomilchen's picture

In a contest of Mr. Market vs. Mr. Printing Press, who will win?

Dragon HAwk's picture

They don't pay us, and we Don't pretend to work... something like that..

Usurious's picture
Usurious (not verified) Oct 26, 2015 9:25 AM

 

Mako

''Ignoring the truth only last so long, about 60-80 years or generation, then the balloon payment comes down the pike.''

http://www.zerohedge.com/article/and-while-we-are-discussing-corruption-...

venturen's picture

BANKERS MUST HAVE BONUSES....all else is theater. 

1stepcloser's picture

One day soon, we are going to awake, only to find FRNs shitting the bed everywhere...

VW Nerd's picture

Without spending and consumptionl the debt cannot be serviced.  Debt riddled producers in the US and EM are getting squeezed.  I think Janet's friends who lent them the money are getting nervous.

gregga777's picture

The US Treasury cannot afford "normalized" interest rates, either. The US Treasury is probably the number one reason why interest rates, in current fiat US dollar terms, can never be "normalized"!

Armed Resistance's picture

And he says, "Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." So I got that goin' for me, which is nice.

froze25's picture

Great Caddy Shack reference.

pods's picture

Big hitter, the Lama.

jon dough's picture

Hey baby, you must've been something before electricity.

undercover brother's picture

Market. what market?  There is no longer any stock market in the true sense.  What used to be markets haved devolved into a asset pricing mechanism based solely upon the probability of the fed raising interest rates.   What Bernanke, Yellen and their comrades in member banks have done is a complete and utter travesty. 

Give up. Reality is not scientific nor even mathematical.'s picture
Give up. Reality is not scientific nor even mathematical. (not verified) Oct 26, 2015 10:27 AM

The biggest problem with this analysis, and the prediction of the FED's rate trajectory is, this will accelerate some growing political problems for the TBTF banks, including the FED.  Is there some conjecture this FED feint is also meant to allay the growing anger of those voters who are savers, and their being shafted and fleeced by this continuing FED deceit?  For that is what this is.  The FED is lying to us.

Easily the second largest voting block in the U.S. are the "savers" in this story.  The largest voting block in the country are the destitute.

The choice seems to be easy.  Bernie Sanders or Donald Trump.  Hillary endlessly harping "Vote for the girl, because they're picking on me," doesn't seem to equate anywhere on the political map.

Dumber things have happened though.  The majority voted for the last guy based on the color of his skin, a simple demagogue.

Bay Area Guy's picture

There are 180 billion reasons the Fed can't raise interest rates.  For each 1% increase in interest rates, the budget deficit rises by $180 billion.  The country is already bankrupt.  Raising rates will just make it bankupter.

RadioFlyer's picture
RadioFlyer (not verified) Bay Area Guy Oct 26, 2015 2:12 PM

What is the difference between Bankrupt or Bankrupter or Bankrupter-er?

 

https://www.youtube.com/watch?v=PXS9rXZe_7A

eclecticskeptic's picture

"You can fool all of the people some of the time and some of the people all of the time, and those are pretty good odds"
eclecticskeptic

Grandad Grumps's picture

The lack of any kind of exit strategy must vex them. In the past, they would simply crash the asset markets, recapitalize and then scoop up cheap assets. The fact that they are not doing it this time, leads me to believe that they have no interest in U.S. Assets that cannot be purchased with cheap debt fiat at ever increasing fiat prices.

So, the assumption must be that they will have no need for a viable USD when they finally trigger their tipping point.

the grateful unemployed's picture

the fed will never raise rates at least relatively speaking. the way i imagine it (fed rate hikes for dummies) is that the fed raises rates at some factor lower than inflation. inflation 2%, rates 1%, and they continue this policy is perpetuity. th ey're goinjg to cook the frog very slowly, unless it gets away from them. they are ready to declare victory on the 2% inflation target, and that will be a big moment, although the market will sell it because its the news and they are buying the rumor right now. and then the politicians will hand out COLAs, applause please, vote for me, and then the long slow process begins. always a day late.