When Will The Fed Raise Rates?

When Will The Fed Raise Rates?  We think Janet Yellen has a big problem, and it will likely impact you and the banking system.

Yellen, the current Fed Chairperson, knows the US economy is at the point where we ought to seriously consider getting rates off zero. The US has had zero interest rates for years now. And we are finally starting to see real signs of economic growth, the first signs since early 2007.  The Fed has worked hard to avoid a re-run of the Great Depression.

And when the Fed raises rates, that impacts mortgage loans, car loans, borrowing money for small business owners and lots of other financial-related points.  And the Fed will clearly have an impact on the stock market.

When the US economy plunged into the Great Depression in late 1929, the economy stay mired-in-the-muck, until the Fed started flooding the banking system with cash, in 1934. Like today, getting the banking system back on solid footing was a primary concern for the Federal reserve.  The economy finally started seeing solid signs of growth in 1936 and into 1937.

And, at that point, the Fed raised rates quickly.
When the Fed raised rates in 1937, they were doing the opposite of adding liquidity to the banking system — they were now contracting the banking system. And almost immediately, the US economy slipped into another serious plunge.

In fact, some will say only gearing up for World War II got the economy out of a severe negative downward spiral.

So Janet Yellen has a big problem. We suspect the Fed will be very hesitant — in fact, downright slow — to act. The Fed won’t raise rates quickly, because they want to avoid another 1937. We expect the Fed will announce “Quantitative Easing” is over, but the “Fed accommodation” period will not be over.

The funny thing is, Janet Yellen spoke openly about this very topic, in a speech she gave over five years earlier, in 2009.

I have linked to the speech here, see the reference to 1937 in the final paragraphs of her presentation.

So, when will the Fed raise rates?  Rates may rise off zero at some point in the future.

But runaway interest rate hikes? We’ll take the “under” on that bet.

We’ve talked about the Federal Reserve and Quantitative Easing in several posts here.  We are fans of Bernanke and Yellen, and our general advice has been to disregard how the “talking heads” spin news from the Federal Reserve.  We recommend instead, just read exactly what they are stating.