Everyone is talking about the FED’s promise to hike interest rates. But nobody is talking about how the FED will do this, except for me.
Next time you read a story like this one, ask yourself: “How will the FED pull this off?”
When Group of 20 finance ministers this week urged the Federal Reserve to “minimize negative spillovers” from potential interest-rate increases, they omitted a key figure: $9 trillion.
There is a growing consensus among insiders that war has broken out and the fallout is already roiling financial markets in a way undetected by most.
That’s the amount owed in dollars by non-bank borrowers outside the U.S., up 50% since the financial crisis, according to the Bank for International Settlements. Should the Fed raise interest rates as anticipated this year for the first time since 2006, higher borrowing costs for companies and governments, along with a stronger greenback, may add risks to an already-weak global recovery.
The dollar debt is just one example of how the Fed’s tightening would ripple through the world economy. From the housing markets in Canada and Hong Kong to capital flows into and out of China and Turkey, the question isn’t whether there will be spillovers — it’s how big they will be, and where they will hit the hardest.
“Liquidity conditions globally will start to tighten,” said Paul Sheard, chief global economist at Standard & Poor’s in New York. “Emerging markets won’t be the only game in town. You will have a U.S. economy that is growing more strongly and also offering rising interest rates and a return on capital that is starting to vie for new investment opportunities around the world.” . . .
Most central bank officials are forecasting that they will raise the benchmark federal funds rate this year from near zero, where it’s been since December 2008. The probability of a Fed liftoff by June, based on trading in futures and options, was about 23% on Thursday, with the odds of an increase by September at 56%, data compiled by Bloomberg show. . .
Developed markets aren’t necessarily immune, especially those such as Canada and Australia, which rely heavily on exports of oil, iron ore and other commodities. Prices of those goods, which are denominated in dollars, have fallen as the greenback has strengthened and demand has weakened.The effects can be seen in Canada, where central bank Governor Stephen Poloz said this week that rising U.S. interest rates could have an additional tightening effect, with a separate IMF report in January saying an overvalued housing market may cool. . .
The Fed’s Open Market Committee in January added “international developments” to a list of issues it takes into account to set policy, alongside domestic concerns such as inflation and the labor market.
While the global environment is unlikely to stop the Fed from raising rates initially, the level of market turmoil may influence the pace and magnitude of subsequent moves, said Edwin Truman, a former head of the Fed’s international-finance division.
Notice that there is no mention of the way that the FED can and will raise rates?
By a magic wand?
By Yellen’s announcement?
Which rates will be affected?
By raising the FedFunds rate above 0.25%? By how much?
How will the FED pay interest on over $2 trillion worth of excess reserves? The money must come out of FED profits. But this means less money being returned to the federal government to keep keep the deficit lower.
Before they tell us what the consequences may be, they should tell us how the FED will do it.