A Good Rate Hike for Europe

Ready for a US Rate Hike?

Even the doves might support a rate hike in September to counter act the charge that they are being bullied out of a September hike by Sarkozy.

Why the Fed Should Postpone Rate Hikes

Indeed, even the markets were fooled, giving the ECB a good grade for its unremarkable rate hike.

Others spoke out as well, and the futures markets quickly predicted another 25 basis point rate hike in March.

But such an insignificant rate hike will do little to relieve long term pressures, because investors will expect more rate hikes and move money into China, increasing upward pressure on the yuan s exchange rate.

At the ECB press conference in early July, Trichet signaled at least one more rate hike either in September or October.

But the recent good economic numbers coming out of France should make an October rate hike easier for French politicians to accept.

So the Fed could, in principle, decide to raise the federal funds rate even before the unemployment rate reaches 6.5 .

Japan s Tax Hike Test

The ECB s paltry rate hike in December, together with the supine promise of no plans for further monetary tightening, demonstrates that Trichet is no Duisenberg.

Although the meager rate hike was presented as a consensus of the ECB s Governing Council, it soon became apparent that the decision had been controversial.

Trichet even had to rescind the rate hike he had signaled for September, though he still claims the increase has been merely postponed, not abandoned.

At the ECB press conference in early July, Trichet signaled at least one more rate hike either in September or October. Some Council members are known to support two more rate hikes before year end.

These incentives are offered in the form of a rate paid for electricity fed to the grid.

First, the divergence of monetary policies between the US and other major economies is already universally understood and expected. Thus, the interest rate differential, like the US rate hike itself, should already be priced into currency values.

Of course, a US recession will also bring further Fed interest rate cuts, which will exacerbate problems later.

The Fed was late in beginning the interest rate normalization process, and it is now paying a price.

Under these conditions, the Fed will want to raise the interest rate to prevent an acceleration of inflation.

That is how Fed bond purchases have historically increased the stock of money and the rate of inflation.

However, late last year, Everbright Bank and some others began offering fixed rate mortgages. Take up has been slow, but the April 2006 surprise hike in bank rates may help to sow greater public awareness of interest rate risk.

For the first time, the ECB president was willing to admit publicly that the Governing Council had discussed the pros and cons of a rate hike at the meeting.

This threat took a heavy toll on the ECB s credibility, since an interest rate hike in the midst of the most serious financial crisis in decades was obviously absurd.

The Fed is buying Treasury bonds and long term mortgage backed securities at a rate of 85 billion a month, equivalent to an annual rate of 1,020 billion.

This implies an interval of two months between interest rate moves instead of the three month interval that has become standard ECB practice in the current interest rate cycle. The next rate hike in the normalization process is expected in October, two months after the expected August move.

This is precisely what happened in September, when the financial crisis made it impossible for the ECB to proceed with the interest rate hike that it had announced in August.

In the previous tightening cycle, which began in 2004, it took the Fed two years to normalize the policy rate.

At that point, the Fed can focus on its fundamental mandate of preventing a rise in the rate of inflation.

A tax hike is only part of that.

First, the Fed is trying to give relatively specific guidance about the future path of the federal funds rate (the overnight rate at which commercial banks lend to each other).

The Fed pumped money into the US economy and slashed its main interest rate the Federal Funds rate from 3.5 in August 2001 to a mere 1 by mid 2003.

The Fed could, in principle, limit inflationary lending by raising the interest rate on excess reserves or by using open market operations to increase the short term federal funds interest rate.

The Fed warns that it might increase the federal funds rate if the anticipated annual inflation rate rises from its current level of a bit less than 2 to more than 2.5 .

The Fed s actions have involved what former Fed governor Larry Meyer calls liquidity tools, as opposed to interest rate based monetary policy.

Fed Up with the Fed

So, sooner or later, a tax hike will be necessary.

With unemployment now at 7.6 and falling only slowly, the Fed may not be ready to raise the federal funds rate until 2015.

This would be a particular problem for the US, where the Fed allowed the Federal funds rate to approach zero in January 2009.

(The Fed raised its benchmark federal funds rate from 1 in 2004 to 5.25 in 2006 and held it there until August 2007).

Senior Fed policymakers deny that their interest rate policy bears any responsibility for risk taking, but there is much evidence to the contrary.

Using his low death rate as a base, Séralini claimed with no statistical analysis that the higher death rate (just below 40 ) for the remaining 180 rats fed with GM corn and Roundup was suspicious.

With its benchmark lending rate at the zero bound, the Fed has embraced a fundamentally different approach in attempting to guide the US economy.

In fact, Congress might tell the Fed that it should wait until there are clear signs of inflation and a much lower unemployment rate.

For example, to make his threats of an interest rate hike in the midst of a global slowdown credible, the ECB president is using his press conferences to tell the world how strong European growth is.