The Federal Reserve should stop trying to raise its benchmark rate. That will only help the banks and act as a tax on everyone else. Savers will get nothing for the first two rate hikes this year, just like what happened after the December hike.
As soon as the Fed released its statement all the big banks sent out press releases that they were raising their prime rates immediately. Less than one minute later, my email inbox was flooded with another press release by the big banks announcing that there would be no increases in CD rates because of the Fed's action.
There are many at the Fed and in pundit land that say the Fed must raise rates to have room to move them down after the Fed causes the next recession. The Fed is also fixated negatively on the unemployment rate and the fact that workers are finally getting real wage increases after years of not getting any real wage increases. The Fed seems to be still embracing the long-discredited Phillips Curve, even though, this time, the labor participation rate is way down and many of the jobs created have only been part-time jobs.
The best ammunition for the Fed would be for the Fed to get its balance sheet under control and to have the ammunition to do some QE programs in the future when it has a clean balance sheet.
It seems the Fed does not like leaving things up to the market to decide. It has a bond hoard of about $4 trillion. The Fed has a gigantic profit on the bonds that it acquired by creating a book entry of U.S. dollars in its computers and then going out and buying the bonds in order to get rates much lower, even though it had already lowered its fed funds rate to near zero.
The Fed had to do several QE operations to get market rates low enough for many people to refinance their mortgages and allowed people who qualified for them very low cost mortgages. It allowed many corporations to borrow money to buy back stock hand over fist to get their stock prices up, which seems to have worked pretty well overall. Of course, the Fed hurt savers, retirees, pension plans and insurance companies got hurt because of the very low interest rates.
An assortment of Fed officials have come out recently and warned us that we should not reach for yield. If they were sincere, they would supply the world's debt market that is dying to get U.S. bonds at the rates they pay and the certainty of repayment.
So, if the Fed were to start selling its longest maturities first and taking huge profits on these bonds, then it would see what the actual currency and bond markets do with the Fed selling into a market begging for yield with a good rating. I think it should announce that it would be selling bonds and that for the rest of the year it will not raise its official rate while it is selling bonds, unless it falls behind the bond market.
When the Fed sells its bonds the bond market should like the supply of USG bonds. The Fed should not raise its funds rate, but instead just reverse its QE programs. The Fed should also say at the same time that the amount of bonds that it will sell would depend on incoming data that should confuse everyone and let the Fed sell bonds without a huge reaction in the bond market.
If several QE programs got us to where we are now after the great recession, why not just reverse the process?
In closing, I think I heard Fed Chairwoman Janet Yellen say several times that the Fed would not change its QE program -- that is still ongoing with the reinvested interest and matured bonds -- and that the Fed would deal with its balance sheet after it starts raising rates. It is going to impair its $4 trillion dollar asset in bonds by doing this and so I figure it will just let the bond portfolio run out.
When you go into a cave in which you are not familiar, you most likely go back out the way you entered. I do not think the Fed and the world has ever been in this negative interest rate cave before.
See full coverage on the Fed's upcoming interest-rate decisions.
Editor's Note: This article was originally published on Real Money at 7:45 a.m. on June 13.
Matt Horween is a certified public accountant and served as a commissioned U.S. foreign service officer for the U.S. Agency for International Development from March 1981 to March 1998. He served in Burkina Faso, Senegal, Egypt, Honduras and Barbados, spending about 15 years overseas. He ended his career stationed in Washington, D.C. as the financial controller for the bureau that controlled the foreign aid program for Europe, including all of Eastern Europe and the former Soviet Union and its former satellite countries. Horween also worked as an auditor for Price Waterhouse & Company in New York City and held various financial management positions for several publically listed corporations. Early in his career, he served as a radio intercept analyst for the U.S. Air Force Security Service and was stationed in Greece.