The U.S. Federal Reserve is expected to keep interest rates on fed funds unchanged on Wednesday, perhaps because their plan to raise interest rates has hit opposition.
The Fed now seems to be taking another approach to hiking interest rates and devastating the US and world economy by shrinking their portfolio of mortgage and Treasury securities.
The Fed started buying these during the financial crisis. They are now the equivalent of about 22% of the GDP of the USA, according to some reports.
The Fed’s Treasuries and MBS holdings are about $2.46 trillion and $1.76 trillion, respectively.
“The Fed has boosted its portfolio of long-term bonds and other assets to $4.45 trillion from less than $1 trillion in 2007, just ahead of the financial crisis. Officials believe the large portfolio has helped to spur economic growth by holding down long-term interest rates,” says Reuters.
Therefore, it follows that the smaller, shrinked portfolios the Fed is planning will lead to an economic downturn by raising long term interest rates.
“Morgan Stanley analysts arrived at their call on the timing of the Fed ending its MBS reinvestments based on the Fed’s projected 3 percent longer-run equilibrium interest rate, together with their own forecast of two rate hikes in 2017 and three in 2018.”
To clarify, Morgan Stanley expects the interest rate to reach 3 percent in the mortgage market, resulting in higher mortgage rates for consumers, hammering already indebted householders, and leading to a wave of foreclosures.
As this blog has pointed out, Americans who are overleveraged by about 10 times their income, have to pay 10% of their income for every 1 per cent increase in interest rates.
The Fed is also planning not to buy more Treasuries, something which will push up the interest rates and wreck havoc on the US economy and dollar.
The Fed is justifying this financial crime by saying that they hope to get the portfolio back to some state of precrisis normalcy.
But the Fed is not supposed to make its decision on historical data but on current data. The USA is now at the end of a bust cycle and debt has reached historical levels. There can be no return to precrisis normalcy with these levels of debt. Where is the inflation?
The U.S. economy is not bumping up against full employment since most of the jobs added have been part time.
The claim that imposing tariffs on Mexican imports also would spur higher inflation is false. Tariffs would spur demand for products made in the USA by making them cheaper and more competititive. Mexican manufacturers would be likely to seek to absorb as much of the tariffs by cutting their costs to avoid losing market share in the USA. American manufacturers would seek to expand production as quickly as possible to capture more of a market share.
The mainstream media even admits that the Fed plan will jolt financial markets, push up interest costs on government debt and mortgages and devastate the the US and world economy.
“A great deal is at stake with the bond decision. Shrinking the portfolio could jolt financial markets, pushing up interest costs on government debt and mortgage bonds and reverberating through the broader economy.”
“Officials… know plenty about the skittishness of investors. When they signaled they would end bond purchases in 2013, they sparked a market “taper tantrum” that sent interest rates higher and hurt emerging markets.
In fact, just floating the plan could push up interest rates, the Fed chair Janet Yellen admitted.
“Sheer anticipation of a drawdown of the bonds could push long-term rates higher, she said in a footnote to her comments. That’s a reason to proceed cautiously.”
Yellen should be put in jail for deliberately trying to push up interest rates to undermine the Trump administration.