Friday, December 18, 2015


Let's face it: adding a quarter per cent to the Federal Funds Rate is no big deal.  Yes, the greedy bankers, as expected, are raising their prime rates — making some loans more expensive — while letting interest rates on CDs and savings accounts stay the same.  They're increasing prime because they can.  They're leaving the interest they pay low for the same reason: because they can.

Really, though, the change is minimal.  Granted, the increase really wasn't justified by higher inflation, because inflation remains very low.  Some think the Fed was anticipating higher inflation based on possibly higher oil prices in the future, but as long as everywhere in the world except the USofA is stuck in slowdown, oil prices will stay low.  So why the increase in the rate?

Mostly, I believe, as an indicator that the recovery really is happening, and because its impact is beginning to be seen in wages as well as asset values.  If the Fed succeeds in instilling greater confidence, it may be that corporations will begin investing their very substantial profits in expanded production, rather than in mergers, acquisitions, and stock buybacks.

If rate increases come as slowly as Dr. Yellen has suggested, no economic slowdown need be anticipated, and the Fed will begin to regain some of the leverage it needs to respond to future crises.

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