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Why Is the Fed So Desperate to Raise Rates? Jim Rickards Explains (Video)
by Peter Schiff, Schiff Gold:
The June Federal Reserve rate hike wasn’t a surprise. Most analysts expected Yellen and company to boost rates by 0.25 points. The only thing that was a little surprising was the hawkish tone the central bankers took at the most recent Federal Open Market Committee meeting. The Fed is hinting it will continue to push forward with interest rate normalization and begin to shrink its balance sheet. This raises an important question.
Why?
As we have pointed out, the data simply doesn’t support the hawkish stance taken by the Fed. Even some mainstream analysts have made this observation. So what gives? Why is the Federal Reserve so desperate to hike rates?
Investor and economic investor Jim Rickards has a pretty good answer. In an interview on Boom Bust filmed during the June FOMC meeting, he said the Fed has to raise rates to get ready for the next recession – and that could be right around the corner.
The reason they’re doing both of these things – the reason they’re raising rates and the reason they’re normalizing the balance sheet – is because they’re getting ready for the next recession. Research shows that you’ve got to lower interest rates about 3% to get out of a recession.”
If the Fed is really prepping for the next economic downturn, it has a problem. At this rate, it won’t get rates to the 3% level until 2019. As Rickards points out, the next recession could be right around the corner. Statistically speaking, we’re due.
But what if a recession happens next month or even next year? This expansion is one of the longest in history. A recession will come sooner than later.”
As Rickards explains, the Fed has backed itself into a corner. This accounts for the apparent urgency to raise rates, despite relatively weak economic data.
How is the Fed going to get us out of a recession if interest rates are only 1%. They’ve got two missions. One is get them up to 3 or 3.5% – at the rate they’re going it may take to 2019. They may not make it that far before the recession hits. But if you’re only at say 1 or 1.5% – 2% – the recession hits and you to lower to zero, the other thing you can do is QE4. You can expand the balance sheet. But you’ve got to reduce the balance sheet before you can expand the balance sheet.”
