On Wednesday, the decision The Federal Reserve Bank (FOMC) has made and will implement, will divide this current economic cycle/era, from the new economic cycle/era to follow from this day forward. Janet Yellen is like a modern economic Moses parting the sea through which to walk; when she walks through she will have left the old economic cycle behind in Egypt, and will begin the U.S. economy on its journey to the promised land––if you like your well-worn and ill-suited similes.
I say Latinos should care and pay attention to this economic event, and if you don’t understand what is going on with economy now, this is a fantastic jumping on point for you to begin understanding the U.S. economy. Many Latinos I communicate with have heard a little bit about what is going to happen this day. My fellow Latinos today will be remembered as either a good decision by the Federal Reserve Bank of the U.S., or a piss poor decision that political vultures will criticize for decades for the support of popular sentiment.
Some background on the previous economic era that is coming to a close: The key interest rate set by the Federal Reserve has been zeroed out since 12/16/07; which has been meant to oil American economic markets with cash liquidity and low borrowing costs; which in turn was meant to encourage borrowing and investment from U.S. firms who would otherwise be cautious with spending in what would have been a struggling economy as a result of the housing market crisis.
Larry Summers’ Article on 12/15/15
Since this action will divide this current economic cycle/era from the next, let us consider the ideas about this action from the Fed, from the possibly the person who will become the next head of the Federal Reserve, former Secretary of the Treasury and Chief Economist of the World Bank Larry Summers.
The reason why we should pay attention to Larry Summers’ comments is because not only is he a former Secretary of the Treasury, but his current writings are widely viewed to be his campaign at becoming the next Chairman of the Federal Reserve, succeeding current Fed Chair Janet Yellen.
In his article, Dr. Summers acknowledges positives about the Federal Reserve. He points out that The Fed telegraphed this interest rate hike to the extreme, and Summers agrees telegraphing as such is the right thing to do. Summers then goes on to voice his well-thought out and outright genius concerns.
Summers’ concerns stem from three key objections:
Summers first asks if The Fed has weighed the risks to raising the key interest rate well enough; in essence, is The Fed taking a chance in a less than absolutely responsible fiduciary manner that is incumbent on an institution that is the risk-free rate.
Summers’ second concern is on the effect of the premature rate hike can possibly have, which is to ask the question, will the rate hike now kill the economy which Summers claims is struggling more than The Fed has led itself to believe?
The drive of Summers two key points is that he believes, and the man of prestige is most assuredly correct if anyone is, that if this rate hike is premature and The Fed reverses itself in shortly after, the effect of a quick reversal of monetary policy by The Fed will potentially have a grievous negative effect, and thus that negative effect can be avoided if the Fed just waits until it sees inflation more clearly approaching on the horizon.
However, it could be possible the Fed seems to be considering all of what Summers is pointing out, and, The Fed could possibly feel it is best to hide the potential strengths that are inherent in a rate hike now that can be reversed within five years from now. Which is to say, if the Fed raises rates now and the economy takes a downturn, the Fed will have the tool of lowering interest rates to stimulate a future economy in a downturn. On the other hand, if the Fed has the key interest rate at a zero-level years from now, and at that time the economy enters a downturn in spite of the zero rate, then the Fed will have the great Spartan spear that is the zero bound Fed interest rate rendered completely useless.
Why should we care?
Vonnie Quinn on Bloomberg Surveillance, on 12/15/15, had the excellent insight that Wednesday’s action by the Fed had already had its effects on Markets (“priced in”), and so people who want to see the results of the Fed raising the Federal Funds rate will have to watch the markets the day after the action is taken. Mark the events of the coming days, weeks, and months, because the beginning of the new economic cycle/era begins 12/17/15.
It should also be noted by Latinos who are learning about economics, that Larry Summers is an authentic and unparalleled Economist. Note that Larry Summers lays out his thinking in writing, leaving it open to scrutiny from his colleagues, and Summers makes predictions while laying out varying scenarios. Bogus Economists on the other hand will make claims and not lay out their thinking, and simply insist that they, the bogus Economist, is the only person who sees things as they are and that every other Economist who disagrees is a fool or a fraud. Pay attention to the structure and high quality of Summers’ thinking and lack of bias.
Bloomberg Surveillance. Vonnie Quinn. Interview. Radio. 12/15/15.
Historical Changes of the Target Federal Funds and Discount Rates.
Summers, Larry H. What the Federal Reserve Got Wrong, and What it Should do Next.
Washington Post. Web. 2015. https://www.washingtonpost.com/news/wonk/wp/2015/12/15/larry-summers-what-the-federal-reserve-got-wrong-and-what-it-should-do-next/
Wikipedia. The Federal Funds Rate. Image/Chart. Web. 2015.