Will Janet Yellen capitulate to greedy bankers and raise interest rates?
The only reason interest rates will rise any time soon is because bankers lobby Janet Yellen for a bad policy that increases banking profits.
Mainstream economists exhibit the same strange herd behavior that prompts most investors and economic forecasters to completely miss important developments. Throughout most of 2015, this motley crew predicted first an increase in June, then in July, then in September, then in October, and now for December. Each time they’ve been more certain in their predictions, culminating in an 80% chance of rising rates in October, and each time, they were “surprised” by the federal reserve’s inaction.
Back in February of 2015 I said the federal reserve will not raise rates in 2015. When the US dollar rallied at the end of 2014, it caused declining export employment and weakened the economy. It had the same effect as raising interest rates in cooling the economy, making a rate hike unnecessary.
The only reasons the federal reserve should raise interest rates is a decline in currency value, crashing bond prices, or high inflation; since we have none of those, we have no reason for a rate increase.
The federal reserve is not a proactive entity. They will not raise rates until forced to do so reactively, and nothing in the current economic circumstances suggests any reaction is necessary. Most influential economists, right or wrong, warn against any change in economic policy that might derail the economic expansion.
So why do we have this persistent talk about raising rates? And why are we seeing stories planted in the mainstream media designed to make higher rates sound like a good thing?
Because bankers want rate hikes.
… it is now more likely that net-interest income and margins will remain flat, or possibly even decline further, in coming months. …
The primary driver of falling net-interest income has been a squeeze on net-interest margins, the difference between what a bank pays for deposits and the yield on its loans. The unusually long period of ultralow rates has compressed margins by more than 27% since 2010. …
As a result, bank profits can shrink even if firms grow lending and market share. At some point, you just can’t make it up on volume.
So the hope was that a rise in the Fed Funds target rate this year would mark the start of an easing of pressure on margins.
When interest rates fall, at first bank margins widen because they immediately reduce what they pay depositors, but it takes time for competition to force down what they can charge. When interest rates hit zero, they can’t pay depositors any less (at least not yet), so competition finally squeezes their margins until they hardly make any money at all.
I’ve been arguing that a major source of the urge to hike interest rates despite low inflation is the self-interest of bankers, whose profits suffer in a low-rate environment. Right on cue, the BIS has a new paper documenting that relationship. The key argument:
The “retail deposits endowment effect” derives from the fact that bank deposits are typically priced as a markdown on market rates, typically reflecting some form of oligopolistic power and transaction services. If the markdown becomes smaller as interest rates decline, then monetary policy tightening will increase net interest income. The endowment effect was a big source of profits at high inflation rates and when competition within the banking sector and between banks and non-banks was very limited, such as in many countries in the late 1970s. It has again become quite prominent, but operating in reverse, post-crisis, as interest rates have become extraordinarily low: as the deposit rate cannot fall below zero, at least to any significant extent, the markdown is compressed when the policy rate is reduced to very low levels.
So whenever you see a story touting how great it will be when interest rates go up, keep in mind that the story is a plant by the major banks running a propaganda campaign to lobby public opinion.
“The reason [the Fed] should have raised rates in September and the reason, failing that, that it should do so this month isn’t that the economy can handle the pain but rather that it could do with the help,” David Kelly, chief global strategist at JPMorgan Asset Management, wrote in a recent research note.
Spoken by a devoted industry shill. Notice they left off the “Chase” from the title of the company he works for. JPMorgan Asset Management is a subsidiary of JPMorgan Chase Bank. The line of reasoning this analyst pursues here is so laughable, if it weren’t from a biased industry shill, it would be truly embarrassing. At it stands, it only represents a loss of soul from the empty suit that wrote it on behalf of his self-serving company.
The consensus view, steeped in decades of economic thought, maintains that higher rates encourage saving instead of spending by households and raises the cost of capital for businesses, weakening current demand. Higher interest rates could also be a negative for asset values, as income generated would be subject to a higher discount rate.The ensuing negative wealth effect would be a drag on consumption. An increase in interest rates is also typically accompanied by a rise in the U.S. dollar, which crimps competitiveness and weighs on production in the tradable goods sectors.
But in practice, the effects of liftoff might well be different this time, some analysts contend.
For households and corporations, nonprice factors like credit ratings or a lender’s regulatory requirements are the far bigger constraints on activity than the cost of carrying debt, and a pickup in interest rates would help alleviate some of these impediments.
What? Credit requirements have no correlation with interest rates. Credit requirements don’t suddenly get relaxed if rates go up. Why would they?
Kelly notes that aspiring homeowners have to meet three criteria to qualify for a mortgage: sufficient savings for a down payment, an acceptable credit score, and proof that they can make their monthly payments. That final component is the most susceptible to rise along with interest rates, but is also “by far the easiest of those hurdles to surmount,” he wrote.
What? When a housing market has inflated to the limit of affordability — which is where we are today — then any increase in borrowing costs lowers affordability, and with a hard cap at 43% DTI, this hurdle is impossible to overcome. What he is saying here is complete nonsense.
In fact, higher interest rates might actually add fuel to, rather than cool, the housing market.
Joe LaVorgna, chief U.S. economist at Deutsche Bank, observes that higher interest rates would be positive for banks’ net interest margins, thereby inducing them to loosen the lending spigots.
There is a grain of truth here. I wrote back in 2013 that To lure private capital to the mortgage market, interest rates must rise. However, that was an argument about rising the return on mortgages relative to competing investment alternatives to compensate for the risk. It was not a plea to raise margins to increase profitability at the banks, which is what he suggests here.
“Debt service is not the problem for people who want to take out a mortgage,” he said. “Lower rates and a flatter curve aren’t going to help the housing market too much if you can’t get a mortgage because standards are still too tight.”
Complete and utter bullshit.
Raising rates prices out qualified borrowers. Lenders can lower the qualification standards back to the non-existent levels of the housing bubble, and it won’t increase demand if these hordes of borrowers can’t finance the prices sellers must obtain to liquidate their cloud inventory mortgage obligations.
For households, this sequence of ultralow rates for an extended period followed by a modest bump higher enables them to have their cake and eat it, too. …
I hope statements like that one set off your bullshit detector. That’s a doozy.
There is only one somewhat-convincing argument in favor of raising rates to stimulate the economy.
“There’s roughly $10 trillion in the banking system that’s earning zero,” added LaVorgna.
From the beginning of the zero interest rate policy at the federal reserve, I argued that they were stealing money from seniors on fixed incomes. If interest rates go up, and depositors start obtaining interest income again, much of that interest income would flow back into the economy to purchase goods and services, stimulating economic growth. Unfortunately, this good argument was not mentioned among the spew in the featured article.
The bottom line is that now is a poor time to raise interest rates. Until we see wage growth and inflation, the federal reserve should do nothing.
Economists live in fear of a repeat of the 1937-1938 recession. The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 percent and production of durable goods fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.
Keynesian economists assign blame to cuts in federal spending and increases in taxes at the insistence of the US Treasury. Historian Robert C. Goldston also noted that two vital New Deal job programs, the Public Works Administration and Works Progress Administration, experienced drastic cuts in the budget which Roosevelt signed into law for the 1937-1938 fiscal year. Monetarists, such as Milton Friedman, assign blame to the Federal Reserve’s tightening of the money supply in 1936 and 1937.
Not everyone agrees with the Keynesian interpretations of the causes of the recession, but most people empowered to make decisions in Washington do, so it’s unlikely they will risk a repeat of the 1937-1938 recession if the price is only a little inflation.
I believe the federal reserve will allow inflation to grow large and go on for longer than most anticipate, particularly most mainstream economists who embarrassed themselves with their poor predictions on federal reserve policy in 2015.