Why Raise Rates?

By Bill Tatro, Special for  USDR

In the 1970’s, Paul Volcker was faced with runaway inflation. Double digits were not the exception but the norm. In order to slow things down he took a page out of the Economics Manual 101 and raised interest rates. This action, in theory, made borrowing more expense and the risk of default even greater.

Chairman Volcker did not, as most people think today, simply wave his magic wand and rates rose.

The lack of the understanding of money and how it works by even money professionals simply amazes me.

The Chairman sold treasuries which were held on the Fed’s books to banks thus taking money out of circulation. In addition, he raised the discount rate which is what the Fed charges on its loans to member banks. A combination of both actions made borrowing by the public much more expensive and reduced the inflationary activity to a mere standstill.

All of this makes perfect economic sense.

Now we enter 2015. Inflation whether determined by core, headline, or the Fed’s own internal measurement, is not approaching the cyclonic days of yesteryear. As a matter of fact, the world in general, and the U.S. in particular, cannot even get the rate to a paltry 2%. That’s paltry by the ’70’s standards.

Mortgage origination is at all time lows. Oil has dropped 55% in 6 months. The housing market’s post ’08 bubble now seems to have sprung a leak. The only jobs being offered are minimum wage.


Mainstream media says rates will rise by mid-summer. The economic gang of 68 (those who unanimously predicted 4% 10-year treasuries by the end of 2014) say increases could be sooner. Even the Fed heads are saying “lackluster inflation won’t prevent a rate hike”.


The only reason that I can see for this lemming like drive to raise rates is for the Fed to rid themselves of what is on their balance sheet.

Being unable to audit the Fed the question is raised “What is on your books and why are you in such a hurry to get rid of it?” Perhaps they have some Solyndra bonds, some Greek ten year paper, or maybe even some Donald Trump IOU’s.

Under the guise of “back to normal” they want to rid themselves of something they are carrying at model prices before they actually have to price them at the real market value.

Who will lose in this endeavor? Not the Fed!


Now it all makes sense!

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.