Back in March, Peter Brockvar observed that even when the economy seemed to be doing moderately well, the Fed wouldn’t have the “guts” to raise interest rates even “25 basis points.” “The cost of money is not the impediment to further growth,” he noted. “There will never be a good time to raise raites of zero when you’ve been there for 6 years.” “The Fed’s screwed.”
Brockvar certainly wasn’t the only one. Back in February, Charles Biderman predicted the Fed wouldn’t raise rates at all this year. In July David Stockman declared that the Fed had already missed its window for raising rates.
In June, Fed Chairman Janet Yellen claimed that rate hikes were coming:
“I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate,” Yellen said, referring to the bank’s most-watched interest rate.
Well, we’re all left wondering when that “appropriate time” will be in the face of recent market sell-offs. Ever since 2009, the Fed’s plan has always been that a short period of ultra-low interest rates would propel the economy into an upward spiral of self-sustaining growth. We just had to get out of the liquidity trap and then let the wealth effect take over. Now, 6 years later, it still hasn’t happened. We’re in the midst of a boom in asset prices, (which may even continue past the current panic), but that is known to be very fragile. We know it’s fragile because the Fed has refused to stop ramming down interest rates. Obviously, the Fed knows that the current boom lives off the low rates and little else.
So now, with all the indicators pointing toward more economic weakness, when is that rate hike going to come?
Krugman’s answer would probably be “never.” There just hasn’t been enough stimulus, and rates haven’t become negative enough, we’ll probably be told.
On the other hand, the Fed may admit it’s been beaten and start to let rates inch up ever so slowly. It will mean a lot of economic pain for a lot of people, but the too-big-to-fail operations won’t have anything to worry about.
By the way, here’s the effective Fed funds Rate since 1998:
