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Fed's Hoenig: Keeping rates low "dangerous gamble"

• Reuters
The Federal Reserve is undertaking a "dangerous gamble" by keeping rates at near zero for so long, and it must start raising rates or risk damaging the nascent U.S. recovery, a top Federal Reserve official said on Friday.

1 Comments in Response to

Comment by Olde Reb
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Horning’s speech was not "stunning." It was exactly what the Fed has been attempting for the past year but cannot do. It is not the Fed that has driven interest rates to such low levels; it is the free market.

The major determination of interest rates is when the Fed auctions billions of dollars of their securities with the Treasury department acting as the auctioneer. The Primary Dealers bid on the components they individually want in response to the amount of currency they have on hand and must invest for some rate of interest. If they have a large amount of cash and do not want to expose that value to the risks of equity markets, they can minimize their risk by purchasing Treasury securities. The higher their bids, the lower the interest rates. A high bid/low interest rate acceptance is not an indication of confidence in the economy. Bids have been high; interest rates have plummeted as depositor’s equity moved out of the stock market.

The Fed attempted to sell long-term securities a couple of months ago at a low interest rate but the DP would not bid high enough. The Fed ate an historic 50 plus percent of the offering. If the Fed had accepted the DP's low bid/high interest rate, it would have caused turmoil in the bond market. A long term commitment at a low interest rate, if inflation is anticipated, would have meant a great loss in value.

The Fed is attempting to manage the total economic system. It cannot. The system is too big. The gyrations are progressively wilder and more unmanageable. The scourge of usury based sovereign debt, a Ponzi scheme, is approaching its inevitable result.

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