Reasons Why The Fed Could Hike Rates

If the Fed hikes rates and intimates a few more hikes are in the cards it will likely be for the following reasons:

The Fed Wants To Mute Fiscal Policy

Over the past decade there has been so much stimulus and government intervention, yet so little results. The Fed and the government have managed to spike the stock market and other asset classes, but very little else. Between the Troubled Asset Relief Program (“TARP”), quantitative easing (“QE”) and zero interest loans to Wall Street firms, the amount of intervention and stimulus has totaled anywhere from $15 trillion to $20 trillion.

I have been on record that the lion’s share of the government stimulus has gone to a select few. If about 80% of all stocks is controlled by 10% of the population then what’s the point in creating a wealth effect in stocks? What was President Trump’s big idea since being elected? He decided to cut corporate taxes, which drove the stock market even higher. Whether those tax cuts will trickle down to the working class remains to be seen. This creates more stimulus on top of the stimulus created during the Obama years. There is a possibility that tax cuts could lead to inflation. If nothing else it did help send financial markets to record highs. If the Fed doesn’t act now it could get behind the curve.

The Fed Wants To Normalize Rates

In 2008 the effect Fed funds rate was nearly 3 percent. It was cut to nearly zero percent in 2009 and started to rise again in 2016. If a normalized level is 2 percent then the current effective Fed funds rate of 1.4 percent is still considered expansionary. I assumed zero interest rates were a temporary stop gap measure, not something that would last in perpetuity. Rates below a normalized level could be helping spike asset prices which inured to the benefit of the investor class. Low rates over an extended period may also have led to undue risk-taking by investors. By normalizing rates the Fed could (1) tamp down wanton speculation and (2) force lawmakers to craft effective fiscal policy and quit hiding behind the Fed’s skirt.

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