Should The Fed Raise Rates?

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For seven years now, the rate The Fed sets to deter­mine the price banks pay to bor­row from it and from each other has been zero, or so close to zero that the dif­fer­ence is imma­te­r­ial. This is, his­tor­i­cally speak­ing, not nor­mal, and The Fed has a des­per­ate desire to return to what is nor­mal, which is rate a few per cent above the rate of infla­tion (see Fig­ure 1).

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Willy2

    I only look at the 3 month T-bill rate, because the FED fol­lows that rate and noth­ing else.

  • John­Smith

    What i don’t get in the dis­cus­sion about inter­est rates is why there is no dif­fer­en­ti­a­tion between the dif­fer­ent usage pos­si­bil­i­ties of loans/credit/debt? Why aren’t there dif­fer­ent inter­est rates on loans for real invest­ments, loans for real estate, loans for con­sump­tion and loans for mar­gin, etc. Cen­tral banks could then more directly reg­u­late the allo­ca­tion of money and debt.

  • Derek R

    I think it would be dif­fi­cult to enforce, John. Accoun­tants would be employed to ensure that money was nom­i­nally bor­rowed for the cheap­est pur­pose even though it would actu­ally be used for a more expen­sive pur­pose. A bit like avoid­ing Stamp Duty on house sales by trans­fer­ring the own­er­ship to a cor­po­ra­tion and then sell­ing the cor­po­ra­tion instead of the house.

  • Tim Ward

    Inter­est rates are dif­fer­ent for dif­fer­ent uses. Real estate loans are low, ~3.5–4.5% or some­thing like that. Mar­gin debt is more like 10–12%, and credit card debt can be much more, like 20% or more.

    Put your­self in the bank’s posi­tion “‘are we going to get our money back, plus ser­vic­ing? What is the secu­rity? What is the col­lat­eral? What is the depre­ci­a­tion rate? ” So high qual­ity col­lat­eral gives you a low inter­est rate, low qual­ity, (or unse­cured) gives you a high rate. And there is a time depen­dency on qual­ity, and deflation/inflation effects etc.