Time for the Fed to Pause

Time for the Fed to Pause

There are more reasons for the Fed to abide by Neel Kashkari’s advice than he articulates in “Pause Interest-Rate Hikes to Help the Labor Force Grow (October 26, 2018).”  

Given today’s Federal debt level, the impact of the Fed’s 3.5% target rate on short-term Treasuries would create a total annual interest expense of $700 billion in 2020, equal to the entire deficit today.  An expense of this magnitude would impinge on economic growth and reduce needed spending on infrastructure.  That's a big price to pay to engage in a preemptive strike against an inflation rate that does not exist yet.

A 3.5% Federal Funds rate would also disincentive bank lending.  Parking excess cash risk-free at the Fed window at that rate would arguably be a better use of bank funds than lending into the economy at 5%, a rate the Fed has no control over. 

If the Fed continues on its projected path of rate increases, they could saddle the economy with unsustainable debt levels and an old-fashioned credit crunch.

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