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What will new Fed leader do?

By From page B7 | March 23, 2014

It’s been said for years that the most powerful man in the world is not the president of the United States, the British prime minister, or the Communist Party boss in the People’s Republic of China.

We’ll have to amend the question to ask, who is the most powerful person when it comes to influencing the world’s economy?

The answer, of course, is the new head of the Federal Reserve’s board of governors, Janet Yellen. Ever since she was nominated, the question has been whether Ms. Yellen is a hawk or a dove when it comes to interest rates.

The term “hawk” describes a Fed head who is more concerned with inflation than the short-term growth of the economy, while a “dove” does not want to risk the higher unemployment that usually comes with rising rates.

There’s a popular misconception that the Fed raises or lowers the prime rate. It doesn’t; its primary weapon is the discount rate, which is the rate that banks pay to borrow from the Fed. Even though the amount of borrowing is a small measure when it comes to the overall economy, it is the influence it has on the federal funds rate. The federal funds rate is the rate set by banks to borrow from one another on what are known as “overnight” loans.

If you’re wondering why you don’t hear, or read about what the Federal Reserve is doing, it’s because rates have been held steady for more than five years. That means tolerable mortgage rates, commercial loan rates and personal loan rates – for the most creditworthy borrowers. The main reason the Fed hasn’t intervened to raise rates, which would slow the economy, is that we’ve had very little inflation. If you’re old enough, you might recall the economic pain and suffering under presidents Ford and Carter, Republicans and Democrats alike.

You might wonder if the soaring inflation and interest rates back in the 1970s and early ’80s can be blamed on either party. I would say “no”; the blame would lie at the feet of OPEC, the Organization of Petroleum Exporting Countries. It was not enough that in 1973 the price of a barrel of oil went from $3 a barrel to $10; in 1979 the price soared from $10 or $15 to $40. That $40 figure, which would be considered very low right now, caused the prices of, well, virtually everything, to rise at the frightening rate of somewhere between 14 percent and 20 percent.

I guess I’m making a short story long, to reverse the old adage, but the inflation of 35 years ago still drives the interest rate decisions made by the Federal Reserve. Now we are playing the guessing game: what will Chairwoman Janet Yellen do?

Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at [email protected]

Bud Stevenson

Bud Stevenson


Discussion | 4 comments

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  • Rick WoodMarch 23, 2014 - 4:01 am

    And when interest rates finally go up, as they will and as they must, then what? If interest on our massive federal debt ticks up even a little, the federal deficit will go through the roof. You think it's bad now? Just wait. What say you, Bud?

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  • The MisterMarch 23, 2014 - 7:52 am

    Why do we pay interest on our "massive federal debt"? A sovereign country, as ours used to be, can issue its own currency debt free... as we have done in the past. But we don't. We borrow money from central banks, such as the Federal Reserve (which is neither part of the government nor do they have any reserves). Question: Where does the private Federal Reserve get all this massive amount of money that we borrow? They make it out of thin air (their admission, not "theory"). They make it out of thin air and loan it to us at interest... massive interest. Our country used to make money out of thin air too... but without incurring debt nor interest. We could easily again... it is just an act of Congress to make the change... the same way the Federal Reserve Act was brought into being a hundred years ago. In that this country is securely under the jackboot of "massive debt" is simply a result of Congress's desire to keep us under such massive debt. It is really this simple. Did you really think that Congress is there to represent you? Ha ha ha ha ha... no.

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  • Rick WoodMarch 23, 2014 - 8:06 am

    Wasn't it the Weimar Republic that took advantage of the ability to make its own money to pay off debts? The result was money worth nothing. How do you assure money is worth something?

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  • The MisterMarch 23, 2014 - 8:51 am

    Actually, Rick, it was the oppressive sanctions by the "victors" against post-WW1 Germany that lead to Germany's decimated economy. It was the elected Hitler whose government reclaimed the sovereign right of any country to issue its own currency debt-free and interest-free (meaning, outside of the global central banking cabal). The economy of post-Weimar Republic era based upon Germany issuing its own fiat currency is what propelled Germany from an economic basket case to an economic powerhouse in just a few short years. This was a direct threat to the global bankers and the bankers thus engineered WW2. And again, it was America's troops that went off to fight another war to secure and profit the global bankers. So, Rick, the exercising of a country's sovereign right to throw off the global bankers can and does create a much better economy for the people and their nation. Of course, this is just the opposite of what you'd love to believe... that global bankers are our friends and are necessary... they are neither!

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