The Fed is Killing the Economy!!
If only looking from a far, it makes sense why the Fed would want to increase interest rates. However, when you dive a little deeper, it doesn't really seem to add up.
The fed has raised interest rates now THREE times in 2018.... when inflation is not out of control, prices are not rising too fast, and maximum employment has not yet been reached.... Does it make sense that they are planning on raising rates even more? Is the Fed not running the risk of destroying this historic bull run?
In reality...... What is raising the rates doing?
- Punishing borrowers and rewarding banks (effectively passing money from consumers hands to banks pockets)
- Inhibiting future borrowing which will effectively slow economic growth
- In the hopes of SLIGHTLY combating rising prices/inflation....
Who does this hurt?
- The average family with a mortgage
- The average post-grad with a student loan
- The average consumer who wishes to spend
- AKA 95% of the population
Who does this benefit?
- Banks who are earning more on the money they have already lent out
- Wealthy investors looking to invest in new bond issuances (new bonds will offer high cpn rates)
- AKA Banks and
It only rewards banks with positive gap, of which there are few. Higher rates will flatten the yield curve and hurt bank investment. Higher interest rates are actually disproportionately bad for the wealthy. It increases their hurdle rate on investments.
Basically higher rates will trigger an economic panic. If the FED continues at this rate, there will be a significant recession in the near term. The funny thing is, if Trump left Yellen at the FED, he likely wouldn't have to deal with this.
With enough forward guidance rates should not trigger economic panic. Honestly, the FED can never win. You and OP are correct in that the FED isn't raising rates to combat inflation since inflation is actually quite manageable right now. I believe the FED is raising rates because they anticipate a recession and are worried they won't have the "bullets" necessary to combat a recession. Pre 2008 FFR was a little over 5% and had to be decreased to zero bound to get the economy back on track. IF they anticipate another recession as bad as that in the coming years then logically their target should be 5.5% in the next 2/3 yrs.
(EDIT: I want to add that I don't think the FED's mentality is "there might be a recession soon, lets get to 5.5%". I just think the concern of a pending recession might play into their desire to begin raising rates. Obviously there are others factors that they undoubtedly consider such as unemployment / inflation / etc.)
Here's the catch though... Obviously nobody can predict if / when / how severe the next recession will be. Either the FED doesn't raise rates, a recession occurs, and they're in a position where they have minimal runway to decrease rates from the 2 to 3% they'll likely be at if they don't act and just wait for a recession to come.
On the other hand they continue to raise rates the way they have been and a recession hits. It would be difficult to discern if a recession was a product of rates rising, general economic strain, or both. They'll be immediately targeted as the "bad guys" that "not only caused the historic bull market to come to an end but ALSO cause a recession.
Honestly, I'd much rather slow growth than risk being ill-prepared for the next crisis, regardless of if it is as more / less severe than 2008.