Reply To: The Fed


For asset-price inflation to continue, investors must pour more and more funding into projects less-and-less likely to pay off in terms of the previous elevated rates of return. Investors with superior foresight recognize this fact first and pull out. When they pull out prices begin to soften or rise less vigorously leading other investors to pull out and so on.

No outsider knows what metrics the Fed actually uses in setting monetary policy.

Here is Janet Yellen on recent monetary policy. She has tended to emphasize the labor market and price inflation as guides and not interest rates.

Sometimes the Fed leads credit markets and sometimes it follows. It’s not unusual for the Fed to lower its target for the FFR and have market interest rates follow downward during the boom and for market interest rates to rise at the end of the bust or beginning of recovery and then the Fed follows by raising its target. This has been the pattern since the dotcom bubble burst.

Market interest rates have remained low mainly because of suppressed demand for credit. This cause can be distinguished from the other possible cause of low rates, which is increased supply of credit, by looking at the amount of credit traded. If it is lower, then smaller demand is the cause. If it is higher, then larger supply is the cause. When rates begin to move up again, the cause is either an increased demand for credit or reduced supply. Clearly, demand is increasing which indicates, if not a recovery, at least a normalization of credit markets.

We have not seen any ill effects of the Fed raising its target rate because it is following market rates upward as they normalize.