Fed Funds Rate Follies

The Fed raised rates. Again. Finally. Good for them.

Why good? Because letting major corporations borrow money for free (or close to it) allows them to fund their daily operations using taxpayer money. Why would anybody use their own bank accounts to pay their workers if they can use the government’s money at no cost?

That’s why, ladies and gents, the stock market has gone crazy over the last few years. It’s not, as some have pretended, because we have a “great economy”; we don’t even have a decent economy, measured by historical metrics. What we have is an economy funded by the government, which allows corporations to put their money to work by buying back shares of their own stock, which kicks up the stock price and allows the executives to vote themselves eye-popping bonuses.

(Yes, sorry. It wasn’t any Obama policies which goosed the stock market; the market operates on supply and demand, just like any other. If IBM wants to buy back a million shares of its own stock, taking them off the open market, the price will, all things being equal, rise.)

That’s why SOME charges on borrowed capital are good; to keep it from being misused and distorting the economy.

A picture of the Fed Funds rate over time shows you what the problem was and still is:

So, this gives you a sense of how…weird….the interest rate environment had to get in order to recover from the mess in 2008. The Fed essentially pumped money into our major corporations using zero interest rates. The AVERAGE funds rate over the last 50-odd years has been 4.9%, while we’re languishing at three-quarters of a percent. The only reason why the Fed would leave rates that low for so long is because of a persisting fear that if they didn’t, the economy might seize up again.

Maintaining low interest rates over time is not a sign of economic confidence.

So, today, we’re approaching the bottom margin of “normalcy”; that dotted line at the bottom is a standard deviation below the mean, telling us that 1.29% should be looked at, in theory, as a lower limit, even during a normal recession.

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