#FederalReserve Is In A Pickle

Here is the status of the Federal Reserve Board (Fed).

Background

Over a year ago the Federal Reserve Board (Fed) stopped Quantitative Easing, aka the buying of securities in order to pump money into the economy to stimulate it.

Feeling the economy was stable, the Fed just raised the Fed Funds Rate.  That is the interest rate the Fed charges banks.

Today

However, several other nations continued to lower their interest rates  and some have a negative interest rate policy, NIRP.  Here is more info on NIRP.

Japan – Why Negative Interest Rates?

Now the Fed is in a pickle because the Fed will look foolish if they reverse course and lower the Fed Funds Rate.

What Is Normal?

http://michaelekelley.com/2015/02/11/fed-inflation-target-is-abnormal/

According to the above website, if the Fed wanted the Inflation Target to be 2%, then the Fed Fund Rate should be 2% plus 1.44% or 3.44%.  Then 3.44% should be the normal Fed Funds Rate.

What Are The Fed’s Options?

How does the Fed get back up to the normal 3.44% Fed Funds Rate?  It can do one or both of these:

1.  Set the long-term interest rate to set a goal OR

2.  Keep unchanged or raise the Fed Funds Rate OR

3.  Offer another round of QE.

The best option is to have another round of QE which has the most influence and least fear while leaving the Fed Funds Rate alone.

Kelley Monetary Policy Rule

The Taylor Rule involves raising the Fed Funds Rate 1 percent for each 1 percent in inflation.  We have no inflation so the Taylor Rule is of no help.

The Kelley Monetary Policy Rule states the Fed Funds Rate will be increased gradually (such as .25% each quarter) and QE will be reduced gradually to zero at a rate inversely proportional to the Fed Funds Rate.

When the Great Recession hit, the Fed lowered the Fed Funds Rate AND offered QE at the same time.  Why can’t the Fed raise the Fed Funds Rate AND offer QE at the same time?

This should eliminate any fear by the Fed or the financial market and get us back to normal.

Good luck.