The Fed Conundrum: Must Raise Rates, Can’t Raise Rates

It’s dawning on a lot of people that The Fed is now in an impossible position. Inflationary pressure fomented by a decade of stimulus is demands that rates rise to keep it from roaring out of control.

A structurally weak, debt-hamstrung economy is highly vulnerable to higher rates, and demands that they stay at historically low levels.

Pick your poison. Do you allow runaway inflation and still more easy money debt bloat or do you choke out the economy?
Most people think interest rates are about to go dramatically higher. But they aren’t going to go dramatically higher. They CAN’T go dramatically higher.

Even the Federal Reserve – which recently raised short-term interest rates to 1.50%-1.75% – said in late March that it will raise short-term interest rates to 3.4% by 2020.
The Fed is lying. It can’t possibly raise interest rates that high. It would cause the next Great Recession.

Bill Gross, “The Bond King”, puts it this way: “The U.S. and global economies are too highly leveraged to stand more than a 2% [short-term interest rate] level in a 2% inflationary world.” In other words, the U.S. and global economies carry a lot of debt today.

So why does that mean the markets can’t handle interest rates higher than 2%?

As Gross says, “When it comes to financial markets… the ‘beast’ is really leverage.” It’s what caused the Great Recession. And if central banks raise rates too quickly, we’ll risk going down that road again.”

Daily Wealth on 4/4/18
Steve Sjuggerud