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fed to raise rates for corporations

From Birch Gold Group

The Federal Reserve’s plan for three small and “gradual” rate hikes in 2017 is already worrying analysts, but newly released minutes from the central bank’s December meeting and insight from recent job data reveal that it might hike rates faster than expected. An uptick in labor markets and wages threatens to put big businesses at a disadvantage, and the Fed may use interest rates to protect them – all at the expense of American workers.

Why the Fed Favors Corporations Over Workers

The Fed has a vested interest in protecting the economy’s biggest drivers: big businesses and corporations. In the eyes of Fed officials, workers are a renewable commodity to be managed and manipulated, but corporations are finite assets to be nurtured and grown.

From the Fed’s perspective, America’s millions of underemployed and unemployed individuals can bounce back if/when the private sector starts generating sufficient demand in the labor market. But once a corporation dies, it’s gone for good.

That’s why workers take a back seat to big businesses in today’s economy.

But it’s this mindset that could severely hurt the American public.

Playing the Inflation Game

The Fed keeps a close watch on the relationships between three core metrics to gauge the pressure being exerted on large businesses, and to subsequently guide the speed and frequency with which they increase interest rates. They are:

  1. Wage inflation – how fast salaries are growing.
  2. Labor market tightness – how many employees are actively working and contributing to corporate overhead.
  3. Consumer price inflation – how much money companies can charge for their goods and services.

The Fed wants to keep consumer price inflation higher than wage inflation; exactly how much higher depends on labor market tightness.

Put simply, the Fed favors corporations by working to keep market prices for their goods and services higher than their personnel costs, which rise with wage inflation and labor market tightness.

Corporate profits become threatened if the economy “overheats” from a rapid increase in wages and employment, but the Fed can use rate hikes to stall the economy and keep big business from getting squeezed.

Can We Expect Rate Hike Surprises in 2017?

The Fed is getting nervous.

Since 2014, wage inflation has been making significant strides compared to consumer price inflation. And as we move into 2017, the labor market is tightening more than expected.

Minutes released on Jan. 5 from the Fed’s meeting in December imply there’s a strong possibility Fed officials could yank the economy’s leash with more aggressive rate hikes:

…Several members noted that if the labor market appeared to be tightening significantly more than expected, it might become necessary to adjust the Committee’s communications about the expected path of the federal funds rate, consistent with the possibility that a less gradual pace of increases could become appropriate…

Even under ideal circumstances, Fed intervention would create a frustrating economic slowdown. And at worst, Fed officials could lose control and push the economy far further than intended.

In the event that the economy is pushed too far, buying protection from the Fed’s runaway train today – through real assets like gold – may prove be a prudent choice tomorrow.

  • socalbeachdude

    Federal Reserve policies did not create low rates at all. The Federal Reserve only sets 2 interest rates other than IOER and those rates have no impact on any other rates in the US economy.

    ALL INTEREST RATES THAT MATTER IN THE US ECONOMY ARE DIRECTLY KEYED OFF THE YIELDS ON US TREASURIES.

    It doesn’t matter a hoot what the Federal Reserve sets the only 2 rates they control to. It wouldn’t matter at all if they set the Federal Discount Rate to 1,000,000,000% tomorrow or if they set the Federal Funds Rate to 1,000% per cent tomorrow.

    There is NO BORROWING EVEN BEING DONE BY BANKS THROUGH THE FEDERAL DISCOUNT WINDOW AT THE FEDERAL FUNDS RATE which is presently 0.75% as BANKS ARE AWASH IN VAST EXCESS FUNDS and have no need whatsoever to borrow a penny from the Federal Reserve which is holding more than $3 trillion of excess reserves presently in the excess reserves accounts of the banks at the Federal Reserve.

    Banks now RARELY BORROW ANYTHING FROM EACH OTHER to which the Federal Funds Rate of 0.25% is applicable as THEY ARE AWASH IN FUNDS and have no need at all to borrow from each other for liquidity purposes which is the only borrowing that is even allowed on an interbank basis to which the Federal Funds Rate is applicable and any such borrowing must always be done on a fully collateralized basis.

    As to to publicly listed corporations, you are absolutely correct that they are borrowing vast sums of money to PROP UP THE SHARE PRICES OF THEIR STOCKS via buybacks. Most all of those funds are NOT COMING FROM BANKS but rather nearly all of those funds are coming through CORPORATE BOND ISSUANCE.

    Corporations in the US now have aggregate debt of more than $14 trillion which is not far different from the $20 trillion of outstanding debt of the federal government.

  • socalbeachdude

    The BOND MARKETS SET INTEREST RATES IN THE US ECONOMY AND NOT THE FEDERAL RESERVE. The yields (interest rates) in the bond markets have been SOARING EVER SINCE JULY and that is where all interest rates that affect the US economy are keyed off, and NOT the only 3 interest rates set by the Federal Reserve which simply do not matter a hoot in the US economy.

    The only 3 rates that the Federal Reserve is involved with setting are:

    1) Federal Discount Rate – currently 1.25%

    2) Federal Funds Rate (which it influences) – currently in the range of 0.50% to 0.75%

    3) Federal Reserve IOER (Interest On Excess Reserves) – currently 0.75%

    The IOER (Interest On Excess Reserves) interest rate does have an immediate beneficial impact for banks as it is the interest paid to banks on their excess reserves accounts inside the Federal Reserve and those accounts now have more than $2.5+ trillion sitting in them.

    The FOMC voted to raise the only 3 interest rates set by the Federal Reserve on December 14, 2016 and indicated that it will raise those only 3 interest rates by about 0.75% in 2017 – but that will remain well behind the yields (interest rates) set by US Treasuries which is what really sets all interest rates that matter in the United States economy..